The timing of costs and benefits

Intertemporal choice (5)

 Costs and benefits occur in different time periods.

 In standard economic theory it is assumed that most people are impatient most of the time.

 UMonday: u(£500Monday) > u(£500Tuesday)

 This does not mean that £500 gives less on Tuesday.

 UMonday: u(£500Monday)

UTuesday:u(£500Tuesday)

Discounting: measuring impatience (3)

 exponential discounting

 present value

 discount factor

X weights future pay-offs

X < 1 if you are impatient

X but degree of impatience may vary over time – people may not stick to their plans

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