If Fred were to consume $1,050 1 year from now, he would consider this as good as spending $1,000 today.He would consider $1,628.89 of consumption 10 years into the future equivalent to $1,000 of consumption today.If the interest rate is 5%, Fred preferences
A)are consistent with exponential discounting.
B)are consistent with hyperbolic discounting.
C)are consistent with geometric discounting.
D)are inconsistent.
E)violate the Weak Axiom of Revealed Preference.

Question

Quizplus · Accepted Answer

Fred's preferences are consistent with exponential discounting because the value of future consumption discounted back to the present aligns with a constant rate of discounting over time. For example, $1,050 in one year being equivalent to $1,000 today implies a 5% interest rate ($1,000 * 1.05 = $1,050), and $1,628.89 in ten years being equivalent to $1,000 today also aligns with a 5% annual discount rate compounded over ten years ($1,000 * (1.05)^10 ≈ $1,628.89). This demonstrates a consistent rate of time preference, characteristic of exponential discounting.

If Fred Were to Consume $1,050 1 Year from Now