FNCE 101 Lecture Notes - Lecture 4: Budget Constraint

18 views2 pages
30 Sep 2015
School
Department
Course
Professor

Document Summary

Intertemporal model: key assumptions, utility function: u(c) = log(c, this captures 2 behaviors: consumer likes consumption and consumer becomes satiated the more she consumes, begins at negative u to positive u (graph it) (increases at decreasing rate) The consumer recognizes that her future happiness is today"s happiness. More savings will increase future consumption: u(c,cf) = log(c) + b*log(cf) where b is usually. If b is 0, consumer doesn"t care about the future. The higher the b, the more the consumer cares about the future. The intertemporal budget constraint tells how you will distribute today"s spending and saving. If you borrowed, you add interest rates to it. Future net assets = af = (a + y c)(1+r) Using one unit of c costs you 1+r for future consumption. Saving one unit of c saves you 1+r for future consumption. The intertemporal budget constraint (cf) captures the trade-off that the consumer makes.

Get access

Grade+20% off
$8 USD/m$10 USD/m
Billed $96 USD annually
Grade+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
40 Verified Answers
Class+
$8 USD/m
Billed $96 USD annually
Class+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
30 Verified Answers

Related Documents