## Marginal rate of time preference between the two periods

The marginal rate of time preference between the two periods is the rate at which the present value of future income is discounted relative to the present value of current income. The marginal rate of time preference measures an individual’s preference for consuming today versus consuming in the future.

## Optimal Allocation of Consumption

In order to allocate consumption optimally between the two periods, an individual must be able to determine the present value of their future income. The present value of future income is calculated by discounting the expected future income by the interest rate between the current and future period. In this case, the interest rate is 2%.

## Calculating the Marginal Rate of Time Preference

The marginal rate of time preference is calculated by dividing the present value of current income by the present value of future income. In this case, the present value of current income is €20,000 while the present value of future income is €45,000 discounted by 2%. This means the marginal rate of time preference is -1.02, which indicates that the individual has a preference for consuming today relative to consuming in the future.

## Conclusion

In conclusion, the marginal rate of time preference between the two periods is -1.02, which indicates that the individual has a preference for consuming today relative to consuming in the future.

## Related Questions

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