An individual earns $100 this and $100 next year. On the diagram below, draw the person's intertemporal budget constraint assuming an interest rate of 5%. (Be sure to label the axes correctly. Put in the appropriate numerical values. Note that subscript 1 denotes this year and subscript 2 denotes next year

An individual earns $100 this and $100 next year. On the diagram below, draw the person's intertemporal budget constraint assuming an interest rate of 5%. (Be sure to label the axes correctly. Put in the appropriate numerical values. Note that subscript 1 denotes this year and subscript 2 denotes next year

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter17: Capital And Time

Section: Chapter Questions

Problem 17.3P

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Suppose a relative has promised to give you $1,000 as a wedding gift the day you get engaged. Assuming a constant interest rate of 5%, consider the present and future values of this gift, depending on when you become engaged. Complete the first row of the following table by determining the value of the gift in one and two years with interest if you become engaged today and save the money. Date Received Present Value Value in One Year Value in Two Years (Dollars) (Dollars) (Dollars) Today 1,000.00 In 1 year 1,000.00 In 2 years 1,000.00 Now complete the first column of the previous table by computing the present value of the gift if you get engaged in one year or two years. The present value of the gift is if you get engaged in two years than it is if you get engaged in one year.
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