Capital - The intertemporal choice model
3 important questions on Capital - The intertemporal choice model
If n denotes the nominal annual rate of interest, expressed as a fraction, and q denotes the annual rate of inflation, also expressed as a fraction, then the real rate of interest is given by:
=> i = (n-q)/(1+q)
The absolute value of the slope of the inter temporal indifference curve at any point is the marginal rate of substitution between future and current consumption. This number of units of consumption in the future a consumer would exchange for 1 unit of consumption in the present, is also called:
The marginal rate of time preference (MRTP). Given by |dC2/dC1|
The MRTP tells us something about the time preferences of a consumer, namely:
|dC2/dC1| > 1 at A, the consumer is said to exhibit positive time preference at that point.
|dC2/dC1| < 1 at A, he is said to exhibit negative time preference at that point.
|dC2/dC1| = 1, the consumer is said to have neutral time reference at that point.
|dC2/dC1| < 1 at A, he is said to exhibit negative time preference at that point.
|dC2/dC1| = 1, the consumer is said to have neutral time reference at that point.
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