Can the price of current consumption in the terms of the future for the bundle be...
Can the price of current consumption in the terms of the future for the bundle be determined by the slope of the budget constraint
Homework Answers
The intertemporal budget is given by
(1 + r)C1 + C2 = (1 + r)Y1 + Y2
where
r is the rate of interest for borrowing / saving
C1 is current consumption
C2 is future consumption
Y1 is current income
Y2 is future income
Now slope of the budget constraint is -(1 + r)
If we compare this budget equation with P1X1 + P2X2 = M, we see that price P1 is (1 + r) so it is the price of current consumption. Now price of future consumption in similar way is 1 and so P1/P2 is 1 + r
Hence, the price of current consumption in the terms of the future (P1/P2) can be determined by the slope of the budget constraint as (1 + r)
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