Oct 02, 2017 term paper 2

CONSIDER A CONSUMER WITH TRUE PREFERENCES RATHER THAN ACTING ON THE BASIS OF THESE PREFERENCES,…

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Consider a consumer with true preferences

Rather than acting on the basis of these preferences, the consumer is myopic and does not realize the true value of second-period consumption. The myopic preferences are given by U =

a. Determine how the level of saving depends on r.

b. How does the level of welfare measured by true preferences depend on r?

c. Assume that there is a population of H consumers who act according to these myopic preferences and that the equilibrium interest rate is rt+1 = a – bst, where st is the total level of savings in the economy. Can myopia ever increase the consumers’ true utilities?

d. Does this form of myopia provide a justification for social security?


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