Question

You’ve decided you need a pet while you’re in Davis, and are considering a boa constrictor and a caiman. The boa would cost you $200 to purchase and $50 per year for food, while the caiman would cost $100 to purchase and $100 per year for food. They both give you the same satisfaction as a pet, and you will give away your pet to a good home after the end of next year. You decide to purchase the boa.

(a) What does your decision say about your personal discount rate?

(b) What does this say about your rate of preference for consumption over time, or rate of time preference? Explain.

Answer 1

a) Let us check the cost of taming each of the pets for a year.

For Boa: The cost of taking care and purchasing is

Cost of caiman is

As mentioned, current satisfaction from both the pets is same and we observe that cost of having Boa is higher than having Caiman. But if I still decide on having Boa, with the assumption that I am rational, this means that I value my future more than I value my present. In present, my consumption (gain from having pet) includes satisfaction from having pet minus the cost of having that pet for a year. With same satisfaction, if I spend more today, this can only be justified if I value my future more, i.e., my personal discount rate >1.

b) Since from part a) I value future more than present, my preference for consumption goes up with time. It is very low in current period and would go up as time increases. I am more of a saver type, who like to think of future more than the present consumption.