Compose a 1500 words assignment on microeconomics. Needs to be plagiarism free! Time preference refers to the rate at which people are willing to trade current benefit for future benefit.
Assuming a time horizon of covering the individual’s two income payments say to and t1, a person will save until his time preference equals the interest rate at the margin. Time preference is assumed here to be initially lower than the interest rate i for the period from t0 to t1, the rate of time preference equals the rate of interest at the margin. At this point, the utility obtained from the last unit of money invested in bonds is just equal to the utility of the last unit of money used for consumption purposes or held in its most liquid form i.e. cash. Savings are presumed to liquidate at time t1.
If on the other hand, we assume that the time preference of the rational utility maximizing individual initially is greater than the rate of interest from bonds, the individual will borrow money until the rate of interest equals the rate of time preference and the equilibrium condition is achieved. This principle can be generalized for time horizon over many periods like that. Thus, each individual plans his saving and consumption by borrowing in a way that for each short future period the marginal time preference becomes equal to the rate of interest in that period.