You have €20,000 of current income and €45,000 of future income. The interest rate between the current and future period is 2 per cent. When you allocate consumption optimally between the two periods, the marginal rate of time preference between the two periods is: Multiple Choice −1.02. −1.00. −1.80. 0.80.

Answer:

The correct answer is 0.80. When you allocate consumption optimally between the two periods, the marginal rate of time preference between the two periods is 0.80. This is because the marginal rate of time preference is the interest rate between the two periods divided by the sum of the current and future income. In this case, the interest rate is 2% and the sum of current and future income is €20,000 + €45,000 = €65,000. Therefore, the marginal rate of time preference is 2% / €65,000 = 0.80.

Supporting Subsection 1: The Definition of Marginal Rate of Time Preference

The marginal rate of time preference is a measure of the opportunity cost of consuming today rather than in the future. It is the interest rate between the two periods divided by the sum of the current and future income. It represents the rate at which people are willing to exchange current consumption for future consumption when their current and future income are known.

Supporting Subsection 2: The Importance of Marginal Rate of Time Preference

The marginal rate of time preference is an important concept in economics as it is used to determine how people allocate their consumption between current and future periods. It is used by economists to analyze consumer behavior and how people make decisions about consumption.

Supporting Subsection 3: The Calculation of Marginal Rate of Time Preference

The marginal rate of time preference is calculated by dividing the interest rate between the two periods by the sum of the current and future income. For example, if the interest rate between the two periods is 2% and the sum of the current and future income is €20,000 + €45,000 = €65,000, then the marginal rate of time preference is 2% / €65,000 = 0.80.

Supporting Subsection 4: The Implications of Marginal Rate of Time Preference

The marginal rate of time preference has important implications for the decisions people make about their consumption. If the marginal rate of time preference is high, then people are more likely to save and invest in the future rather than consume in the present. Conversely, if the marginal rate of time preference is low, then people are more likely to consume in the present rather than save and invest in the future.

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