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What is the assumption relaxed in some models to achieve greater descriptive realism?
What is the assumption relaxed in some models to achieve greater descriptive realism?
The difference in the enumerated and other intertemporal discount rates between a small amount ($10) and a large amount ($1000) was smaller when the two judgments were made in close succession.
The difference in the enumerated and other intertemporal discount rates between a small amount ($10) and a large amount ($1000) was smaller when the two judgments were made in close succession.
False
Who was the first to consider alternatives to exponential discounting in the economics literature?
Who was the first to consider alternatives to exponential discounting in the economics literature?
R.H. Strotz (1955-56)
According to the model by Jon Elster (1979), the per-period discount rate between now and the next period is ______________.
According to the model by Jon Elster (1979), the per-period discount rate between now and the next period is ______________.
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Match the following models with their characteristics:
Match the following models with their characteristics:
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The DU model incorporates additional considerations into the instantaneous utility function.
The DU model incorporates additional considerations into the instantaneous utility function.
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What is the utility from anticipation?
What is the utility from anticipation?
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What is the difference in the sign effect between a within-subjects design and a between-subjects design?
What is the difference in the sign effect between a within-subjects design and a between-subjects design?
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What does the term 'time discounting' encompass?
What does the term 'time discounting' encompass?
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The DU anomalies necessarily violate standard principles that people believe they should uphold.
The DU anomalies necessarily violate standard principles that people believe they should uphold.
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What is the term used to refer to the preference for immediate utility over delayed utility?
What is the term used to refer to the preference for immediate utility over delayed utility?
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The DU model was developed by, among others, John Rae, Eugen von Böhm-Bawerk, Irving Fisher, and _______________________.
The DU model was developed by, among others, John Rae, Eugen von Böhm-Bawerk, Irving Fisher, and _______________________.
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Match the following economists with their contributions:
Match the following economists with their contributions:
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What is one of the ways alternative theoretical models depart from the DU model?
What is one of the ways alternative theoretical models depart from the DU model?
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The DU model takes into account psychological considerations discussed by early economists.
The DU model takes into account psychological considerations discussed by early economists.
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Some alternative theoretical models introduce systematic _______________________ of future utility.
Some alternative theoretical models introduce systematic _______________________ of future utility.
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What is the name of the model that assumes the overall value of a sequence of outcomes is equal to the discounted sum of the utilities in each period?
What is the name of the model that assumes the overall value of a sequence of outcomes is equal to the discounted sum of the utilities in each period?
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According to the DU model, people evaluate the results of intertemporal choices independently of any expectations they have regarding consumption in future time periods.
According to the DU model, people evaluate the results of intertemporal choices independently of any expectations they have regarding consumption in future time periods.
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What is the name of the concept that states that preferences over consumption profiles are not affected by the nature of consumption in periods in which consumption is identical in the two profiles?
What is the name of the concept that states that preferences over consumption profiles are not affected by the nature of consumption in periods in which consumption is identical in the two profiles?
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The DU model explicitly assumes that the overall value of a sequence of outcomes is equal to the (discounted) sum of the utilities in each _________________.
The DU model explicitly assumes that the overall value of a sequence of outcomes is equal to the (discounted) sum of the utilities in each _________________.
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Who are some of the researchers who have developed axiom systems for the DU model, in addition to Koopmans?
Who are some of the researchers who have developed axiom systems for the DU model, in addition to Koopmans?
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According to the DU model, the utility of an experienced outcome is affected by other outcomes that one might have experienced.
According to the DU model, the utility of an experienced outcome is affected by other outcomes that one might have experienced.
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Match the following researchers with their contributions to the DU model:
Match the following researchers with their contributions to the DU model:
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What is the assumption of the DU model that penalizes utility that is experienced later?
What is the assumption of the DU model that penalizes utility that is experienced later?
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Who was the first economist to propose the idea of habit formation?
Who was the first economist to propose the idea of habit formation?
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Habit formation models assume that high saving rates cause high growth.
Habit formation models assume that high saving rates cause high growth.
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What is the form of the period-τ instantaneous utility function in habit formation models?
What is the form of the period-τ instantaneous utility function in habit formation models?
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The incorporating habit formation into business cycle models can improve their ability to explain movements in _______________________ prices.
The incorporating habit formation into business cycle models can improve their ability to explain movements in _______________________ prices.
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Who showed that habit formation might explain the recent finding that high growth rates cause people to save more?
Who showed that habit formation might explain the recent finding that high growth rates cause people to save more?
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In habit formation models, the state variable zτ is decreasing in past consumption.
In habit formation models, the state variable zτ is decreasing in past consumption.
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Match the following authors with their contributions to habit formation models:
Match the following authors with their contributions to habit formation models:
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What is the name of the empirical puzzle that habit formation models can help explain?
What is the name of the empirical puzzle that habit formation models can help explain?
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What is the assumption that motivates a person to spread consumption over time?
What is the assumption that motivates a person to spread consumption over time?
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Derek Parfit's claims about the diminishing psychological connections between our current and future selves are descriptive.
Derek Parfit's claims about the diminishing psychological connections between our current and future selves are descriptive.
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Why do people care less about their further future selves?
Why do people care less about their further future selves?
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The assumption of positive time preference is motivated by the idea that the discount rate ρ is ______________.
The assumption of positive time preference is motivated by the idea that the discount rate ρ is ______________.
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What is the effect of positive time preference on intertemporal choice?
What is the effect of positive time preference on intertemporal choice?
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Match the following concepts with their descriptions:
Match the following concepts with their descriptions:
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The assumption of diminishing marginal utility is more questionable than the assumption of positive time preference.
The assumption of diminishing marginal utility is more questionable than the assumption of positive time preference.
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What is the implication of Parfit's argument about the rationality of time discounting?
What is the implication of Parfit's argument about the rationality of time discounting?
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Study Notes
Time Discounting and Intertemporal Choice
- Time discounting is the tendency to care less about a future consequence, including factors that diminish the expected utility generated by a future consequence.
- Time preference refers to the preference for immediate utility over delayed utility.
Historical Origins of the Discounted Utility Model
- The historical developments that led to the formulation of the Discounted Utility (DU) model help explain the model's limitations.
- Major figures in the development of the DU model include John Rae, Eugen von Böhm-Bawerk, Irving Fisher, and Paul Samuelson.
Utility Independence and Time Discounting
- The DU model assumes utility independence, which means that the overall value or "global utility" of a sequence of outcomes is equal to the discounted sum of the utilities in each period.
- The assumption of utility independence creates opposing forces in intertemporal choice: diminishing marginal utility motivates a person to spread consumption over time, while positive time preference motivates a person to concentrate consumption in the present.
Assumptions of the Discounted Utility Model
- The DU model assumes diminishing marginal utility and positive time preference.
- The assumption of diminishing marginal utility seems strongly justified, while the assumption of positive time preference is more questionable.
Alternative Theoretical Models
- Alternative models have been developed to address the limitations of the DU model, including models that relax the assumption of constant discounting, incorporate additional considerations into the instantaneous utility function, and depart from the DU model more radically.
Hyperbolic Discounting
- Hyperbolic discounting models assume that the per-period discount rate between the present and the next period is different from the per-period discount rate between any two future periods.
Habit-Formation Models
- Habit-formation models propose that the utility from current consumption can be affected by the level of past consumption.
- These models assume that the period-τ instantaneous utility function takes the form u(cτ; cτ − 1, cτ − 2,...) where ∂2u ⁄ ∂cτ ∂cτ ′ > 0 for τ′ < τ.
- Habit formation may help explain empirical puzzles in macroeconomics, such as the relationship between saving rates and growth rates.
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Description
This quiz covers the concepts of time discounting and intertemporal choice, including the discounted utility model and its historical origins. Learn about the factors that influence our preferences for immediate versus delayed utility.
