FNCE 101 Lecture Notes - Lecture 4: Budget Constraint
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.