Micro Exam 1

Future value in exactly n periods from now

FV=PV×(1+r)ⁿ

Present value of a payout in n periods

PV = FV_n/(1 + r)ⁿ

Perpetuity formula where C represents the payments that begin next year and continue indefinitely

C=PV×r

Intertemporal choice budget line

C₁+ C₂/(1+r) = m₂/(1+r) + m₁

Savings in Period 1 (Intertemporal Choice)

s₁ = m₁ - c₁

Slope of the intertemporal choice budget line

-(1+r)

Income effect of a saver after interest rate goes up

Real income goes up, consumption in period 1 goes up, consumption in period 2 goes up

Substitution effect of a saver after interest rate goes up

C₁ is relatively more expensive, consumption in period 1 goes down, consumption in period 2 goes up

Net effect on demand of increase in interest rate (intertemporal choice)

Consumption in period 1 is indeterminate, C₂ goes up.

Slutsky and Income (m)

m’ - m = (P’_x - P_x)x

budget line for consumption and leisure where m is non-labor income and L-bar is total time

C+WL = W(L-bar)+m