Different time discount rates

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Reference no: EM13997418

Suppose Fred and Barney have different time discount rates. There are two periods of life: “young”, and “old”. Fred’s present value of receiving a dollar next period is given by $1/(1+r), r=0.5 whereas Barney’s value for r is 0.02. Fred and Barney are currently “young”, living in Colorado, and deciding whether to become marijuana smokers. Suppose all utility is viewed in dollars, and they both value the current (when “young”) utility of smoking to be $10,000 and they both understand that with probability 0.3, they would develop lung cancer when old (which would involve utility of -$40,000).

[note: The scientific evidence on this is mixed, but let’s just suppose there is a 0.3 cancer risk].

Would Barney decide to become a smoker? Why or why not? Would Fred decide to become a smoker? Why or why not?

Reference no: EM13997418

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