Question

Answer True or False, and very briefly explain:

1. Time inconsistent preferences suggest that the discount rate for the future is constant.

2. Engel said, as income increases, the % of income spent on food decreases. This also applies to the poor.

3. Education and health are positively associated, but the CAUSAL effect of education on health is unclear.

Answer 1

(1) Time inconsistent preferences use hyperbolic discounting, where the discount rate in the near future is higher and the discount rate in the distant future is lower. Whereas in case of exponential discounting, discount rate is constant and the time inconsistent preferences are based on hyperbolic discounting, rather than exponential discounting, So, the statement is FALSE.

(2) Engel law states that the share of food expenditure declines as income increases, i.e., income elasticity of demand for food is between 0 and 1. The overall spending of food may increase but the share of expenditure on food declines. This holds true for both poor and rich. Therefore, the above statement is TRUE.

(3) Education and health are positively related, but the CAUSAL effect of education on health is unclear. A good health may be a result from higher educational attainment and poor health may be a result of low education. However, it may also be the case that, a higher education may be a result of good health as an ill person may not attain higher education and vice versa. Hence, the CAUSAL effect is not clear. Thie above statement is TRUE.