NNAMDI AZIKIWE UNIVERSITY, AWKA

ECONOMICS DEPARTMENT

NAME: ODUNUKWE CHIAMAKA MARYCYNTHIA

COURSE TITTLE: INTERMEDIATE MICRO

ECONOMICS
COURSE CODE: ECO 315

ASSIGNMENT TOPIC: WRITE ON INTERTEMPORAL CHOICE

LECTURER : DR.BENEDICT UZOECHINA

 INTERTEMPORAL CHOICE
This is the process why which people make decision about what
and how much to do at various point in time.When choice at
one time influence the possiblities available at other points in
time.
Intertemporal choice is an economic term describing how
present decision affect what options become available in
Future.
Every decision that you make will have an impact on the other
things that you will be doing after that.Making a business plan
is not just about the fact that you will invest two(2)hours of
your time to work on it.It is important that you make the right
choice about when you will do it,this will impact your levels of
productivity .If you choose to work in the evening then it's likely
to be less productive compared to if you choose to work on it in
the morning when your energy level is higher .Many people are
struggling to achieve their goals because they make choices tat
have negative consequences in a long -run.Eg: If you decide to
spend the little you have on the latest and expensive gadget
then you would be struggling with savings and finances.
 MODELS OF INTERTEMPORAL CHOICE
Most choices require decision-makers to trade-off costs and
benefits at different points in time. Decisions with
consequences in multiple time periods are referred to as
intertemporal choices. Decisions about savings, work effort,
education, nutrition, exercise, and health care are all
intertemporal choices.
Models provide a lens with which to examine empirical
evidence and help identify new questions to explore.Most
models share the unifying features of giving some special
priority to the present.To formalize the idea that the present is
qualitatively treated differently than other periods,a
metacategory of Models is introduced,The present-focused
preferences exist if agents are more likely in the present to
choose an action that generates immediate experienced utility,
then they would be if all the consequences of the actions in
their choice set were delayed by the same amount of time.
More informally, this amounts to people choosing more
impatiently for the present than they do for the future.

The term present-focus, rather than the more common term

present-bias, because bias implies a prejudgment that the
behavior is a mistake. Models that produce presentfocused
preferences include: hyperbolic and quasi-hyperbolic
discounting (i.e., models with present bias); temptation that is
experienced when choosing for now but not when choosing for
the future; an interaction between myopic and planner selves;
objective counter-party risks; and distortions in the perception
of time or in forecasting the future. Present-focused
preferences serve as a meta-category that identifies key
commonalities among most of the models in the intertemporal
choice literature.
The working model of Intertemporal choice was (Exponential)
discounted utility model developed by Ramsey (1928) and
Samuelson (1937), which features time-seperable utility flows
that are exponentially discounted,But exponentially discounting
utility model is not descriptively accurate.people seem to
struggle when they make Intertemporal tradeoffs,a
phenomenon, which has been extensively discussed by moral
philosophers, political economists, psychologists and policy
makers.
Theory of discounted utility is the most widely used framework
for analysing intertemporal choices. This framework has been
used to describe actual behaviour (positive economics) and it
has been used to prescribe socially optimal behaviour
(normative economics).
Descriptive discounting models capture the property that most
economic agents prefer current rewards to delayed rewards of
similar magnitude. Such time preferences have been ascribed
to a combination of mortality effects, impatience effects, and
salience effects. However, mortality effects alone cannot
explain time preferences, since mortality rates for young and
middleaged adults are at least 100 times too small to generate
observed discounting patterns.
Normative intertemporal choice models divide into two
approaches. The first approach accepts discounting as a valid
normative construct, using revealed preference as a guiding
principle.
The second approach asserts that discounting is a normative
mistake (except for a minor adjustment for mortality
discounting). The second approach adopts zero discounting (or
nearzero discounting) as the normative benchmark.
The most widely used discounting model assumes that total
utility can be decomposed into a weighted sum – or weighted
integral – of utility flows in each period of time.
FISHER'S MODEL OF INTERTEMPORAL CHOICE
Irving Fisher developed a model to analyse how rational,
forward-looking consumers make consumption choices over a
period of time.
Fisher’s model of intertemporal choice illustrates at least three
things:
(1) the budget constraints faced by consumers,
(2) their preferences between current and future consumption,
and
(3) how these two conjointly determine households’ decision
regarding optimal consumption and saving over an extended
period of time. Modern economist have gone one step ahead
of this and have included borrowing constraints also while
analysing consumption choice over time.

WHAT DOES INTERTEMPORAL CHOICE SHOW ON A BUDGET

CONSTRAINT?
Since consumption decisions are taken over a period of time
consumers face Intertemporal budget constraint which shows
how much income is available for consumption now and in the
future.This constraint reflect a consumer today and how much
to save for the future.
 Rational individuals always prefer to increase the quantity or
quality of the goods and services they consume.However,most
people cannot consume as much as they like due to limited
income.In other words,people face a budget constraint, which
sets a limit on how much they can spend.
Since consumption decisions are taken over a period of time ,
consumers face Intertemporal budget constraint, which shows
how much income is available for consumption now and in the
future.This constraint reflects a consumers decision on how
much to consume today and how much to save for the future.
The line EFJG is the consumer’s intertemporal budget con-
straint. It shows the alternative combinations of period 1 and
period 2 consumption the consumer can choose. If the
consumer is at point F, he consumes his entire income in both
the periods (Y1 = C1 and Y2 = C2, S = 0, B = 0). At point E, C1 = 0
and Y1 = S.
Therefore C2 = (1 + r)Y1 + Y2. Thus if he chooses points
between E
and F, he
consumes less than his income in period 1 and saves the rest
for period 2.

Intertemporal Budget Line

At point G, C2 = 0. This means that the consumer borrows the

maximum possible amount against Y2. This means that C1 is Y1
+ Y2/(1 + r). Thus if he chooses any point between F and G, he
consumes more than his income in period 1 and borrows to
make-up the difference. Various other points on the budget line
EFG are attainable points.