Applications of rational choice and demand theories

1
Applications of rational choice and demand
theories
2
A Gasoline Tax and Rebate
3
Educational Choice under the Current System
4
Educational Choice under a Voucher System
5
The Demand Curve Measure of Consumer Surplus
6
The Loss in Consumer Surplus from an Oil Price
Increase
7
An Individual Demand Curve for Tennis Court Time
8
Budget Constraintsfor 2 Years
9
Rising Housing Prices and the Welfare of
Homeowners
10
Falling Housing Prices and the Welfare of
Homeowners
11
The Bias Inherent in the Consumer Price Index
12
The MARTA Fare Increase
13
Intertemporal Consumption Bundles
14
The Intertemporal Budget Constraint
15
Intertemporal Budget Constraint with Income in
Both Periods, and Borrowing or Lending at the
Rate r
16
Present value

• More generally, the present value of a payment of
  X euros in T years from now is given by X/(1r)T.
• The budget constraint can be expressed in terms
  of present value (price in period-1 1)
• c1(1/(1r)) c2 m1(1/(1r)) m2
• or in terms of future value (price in period 21)
• (1r) c1 c2 (1r) m1m2

17
An Intertemporal Indifference Map
18
Marginal rate of time preference

• The marginal rate of time preference is the
  number of unit of consumption in the future a
  consumer would exchange for 1 unit of consumption
  in the present.
• It is given by the slope of the intertemporal
  indifference curve at a given point.
• If MRTPgt1, the consumer exhibits positive time
  preference
• If MRTPlt1, the consumer exhibits negative time
  preference
• If MRTPgt1, the consumer exhibits neutral time
  preference
• For interior solution, positive time preference
  is the rule since rgt0.

19
The Optimal Intertemporal Allocation
20
Patience and Impatience
21
The Effect of a Rise in the Interest Rate
22
Permanent income

• The permanent income is the present value of
  lifetime income.
• The permanent income hypothesis says that
  permanent income, not current income, is the
  primary determinant of current consumption
• If the consumer can freely borrow or save, an
  increase in the current income will lead to an
  increase of consumption at all periods.

23
Permanent Income, not Current Income, is the
Primary Determinant of Current Consumption