Intertemporal rate of substitution

[foshizzle]

So the rate of substitution is the ratio of marginal utiilty of consumption in future over marginal utility of consumption today.

According to the book, it is low in good times. But that does not make sense.

In good times, your utility derived from additonal consumption today is low relative to the future, so the ratio should be high.

[foshizzle]

From the CFAI text,

“In “good” economic times, individuals may have relatively high levels of current income so that current consumption is high. In this case, the utility derived from an additional unit of consumption today will be relatively low.”

This suggests that the ratio is high.

[Nukular]

@foshizzle

In good times, your utility derived from additonal consumption today is low relative to the future, so the ratio should be high.

The first part of the sentence (before “relative”) is true. Whether or not the remainder of the sentence is true depends on the economic outlook.

[sydneyguy]

@foshizzle

So the rate of substitution is the ratio of marginal utiilty of consumption in future over marginal utility of consumption today.

According to the book, it is low in good times. But that does not make sense.

In good times, your utility derived from additonal consumption today is low relative to the future, so the ratio should be high.

Would you worry more about the future in Good economic conditions or in bad economic conditions?

Or

Would your marginal utility of consumption in future be High compared to marginal utility of consumption today in Good Economic Conditions or in Bad Economic Conditions?