A consumer spending excessively today, intending to start saving for retirement tomorrow, but deciding to continue spending when tomorrow arrives is an example of:
A) an income effect offsetting a substitution effect.
B) time-inconsistent preferences.
C) spending out of permanent income, but not out of transitory income.
D) an intertemporal budget constraint.

Question

Quizplus · Accepted Answer

This scenario is an example of time-inconsistent preferences, where the individual's present self is willing to spend excessively, with the intention of saving in the future, but when the future arrives, their present self prefers to continue spending rather than saving. This highlights a lack of consistency in decision-making over time.

A Consumer Spending Excessively Today, Intending to Start Saving for Retirement