Julia's Impatience at Her Endowment Point

Explaining Disparate Outcomes: The Impact of Situational Differences on Identical Preferences

An indifference curve shows combinations of consumption this year and consumption next year that give an individual equal satisfaction. The curve is convex, bowing in towards the origin. Point A on the curve represents a situation with low consumption this year and high consumption next year. Point B, on the same curve, represents high consumption this year and low consumption next year. By comparing the slope of the curve at these two points, what can be deduced about the individual's state of mind?

Situational Preferences and Curve Steepness

An individual has very little income for consumption this year but has been guaranteed a large inheritance that will be available for consumption next year. A statement is made: 'At their current position, this individual's indifference curve relating consumption this year to consumption next year is relatively flat, signifying they are not very willing to sacrifice future consumption for a small amount of present consumption.' Is this statement correct?

An individual's willingness to trade future consumption for present consumption changes based on their current situation. Match each situation described below with the correct description of their resulting impatience and the corresponding characteristic of their indifference curve at that point.

Graphical Representation of Situational Impatience

Comparing Situational Impatience

Evaluating a Loan Program

An individual's preferences for consumption now versus consumption in the future can be visualized with a curve where any point on the curve provides the same level of satisfaction. A steeper curve at a given point indicates a greater willingness to give up future consumption for a small amount of present consumption. Consider two individuals, Sam and Pat, who have identical underlying preferences. Sam currently has very low levels of consumption, while Pat has very high levels of consumption. Both are offered an identical loan that would increase their consumption today. Based on this information, what is the most likely outcome?

Consider the principle that an individual's willingness to trade future consumption for present consumption is situational and can be visualized by the slope of a curve. A financial analyst claims: 'Regardless of a person's current level of consumption, it is always an irrational financial choice to accept a loan that requires paying back a much larger amount in the future for a small sum today.' This analyst's claim is a correct conclusion from the economic principle.

On a graph plotting an individual's preferences between consumption today and consumption in the future, a very steep curve at a point where current consumption is low indicates a high degree of __________, reflecting a strong willingness to trade a large amount of future consumption for a small amount of present consumption.