Lucas must make consumption decisions over three time periods, $t=0,1,2$. His preferences do not satisfy stationarity and he values current consumption more than future consumption. Let $\delta_{1}$ be the discount factor on consumption that is one period in the future and $\delta_{2}$ be the discount factor on consumption that is two periods into the future. Which of the following is true? A) $\delta_{1}=\delta_{2}$ B) $\delta_{1}\delta_{2}$ C) $\delta_{1}=1$ D) $\delta_{1}

Question

Lucas must make consumption decisions over three time periods, $t=0,1,2$. His preferences do not satisfy stationarity and he values current consumption more than future consumption. Let $\delta_{1}$ be the discount factor on consumption that is one period in the future and $\delta_{2}$ be the discount factor on consumption that is two periods into the future. Which of the following is true?
A) $\delta_{1}=\delta_{2}$
B) $\delta_{1}>\delta_{2}$
C) $\delta_{1}=1$
D) $\delta_{1}<\delta_{2}$

Quizplus · Accepted Answer

Since Lucas values current consumption more than future consumption, his discount factor for consumption one period in the future ($\delta_{1}$) will be larger than his discount factor for consumption two periods into the future ($\delta_{2}$), reflecting a higher valuation of nearer-term consumption. This means $\delta_{1}>\delta_{2}$.

Lucas Must Make Consumption Decisions Over Three Time Periods t=0,1,2t=0,1,2t=0,1,2 His Preferences Do Not Satisfy Stationarity and He Values

Lucas Must Make Consumption Decisions Over Three Time Periods $t=0,1,2$ His Preferences Do Not Satisfy Stationarity and He Values