Macroeconomics, 2nd Edition by Pearson

CONSUMPTION

67

A farmer who has had a bumper harvest this year, which by the law of

averages should turn into a poor harvest next year, is likely to have negative

time preferences currently. Similarly, the son of a tycoon who is due to inherit

the empire in the future will have a very small current income compared with

the future income and is likely to have positive time preference.

3.2.2

Time Preference and the Permanent Income

Exactly as is the case in the standard choice theory, the consumer’s problem is

to maximize their utility subject to the budget constraint

Max

U

=

U

(

C

1

, C

2

)

such that

C

1

+

C

2

_____ ...