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What is adwoa present value of seeing the movie tomorrow

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Reference no: EM133525937

Case Study: Adwoa's friend tells her that 2001: A Space Odyssey is good. Adwoa is trying to decide between reading the book and watching the movie.

Assume that the movie yields an immediate utility of 1 in the single period (single day) during which Adwoa watches it, and a utility of 0 thereafter.

Assume that the book yields a utility of 0.1 for each of 100 periods during which she reads it, and a utility of 0 thereafter.

Adwoa's utility function at time tis Ut=u(ct)+β∑∞i=t+1δiu(Ci), representing the fact that she discounts the utility of future consumption.

First, suppose that β=0.5 and δ=0.92.

Question a)What is Adwoa's present value of seeing the movie tomorrow (one period from now)?

Question b)What is Adwoa's present value of reading the book, starting tomorrow (one period from now)?

Question c)Which does she plan to choose tomorrow?

Question d) This utility function is time inconsistent. Did this particular example actually demonstrate time inconsistency?

 

Reference no: EM133525937

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