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In a typical intertemporal consumption model, the above summation of utilities discounted from various future times would be maximized with respect to the amounts x t consumed in each period, subject to an intertemporal budget constraint that says that the present value of current and future expenditures does not exceed the present value of ...
Therefore, the preferences at t = 1 is preserved at t = 2; thus, the exponential discount function demonstrates dynamically consistent preferences over time. For its simplicity, the exponential discounting assumption is the most commonly used in economics. However, alternatives like hyperbolic discounting have more empirical support.
In economics, a discount function is used in economic models to describe the weights placed on rewards received at different points in time. For example, if time is discrete and utility is time-separable, with the discount function f(t) having a negative first derivative and with c t (or c(t) in continuous time) defined as consumption at time t, total utility from an infinite stream of ...
For the hyperbolic model using g(D), the discount for a week from now is () =, which is the same as for f in the exponential model, while the incremental discount for an additional week after a delay of D weeks is not the same: (+) = + From this one can see that the two models of discounting are the same "now"; this is the reason for the choice ...
Cost–volume–profit (CVP), in managerial economics, is a form of cost accounting. It is a simplified model, useful for elementary instruction and for short-run decisions. It is a simplified model, useful for elementary instruction and for short-run decisions.
Examples include quantity discounting, bulk pricing and two-for-one offers. [43] Third-degree price discrimination prices products or services differently based on the unique demographic of different groups. Examples of third-degree price discrimination are student or senior discounts, or discounted travel tickets for last-minute buys. [44]
Discount rate estimation: Traditionally, DCF models assume that the capital asset pricing model can be used to assess the riskiness of an investment and set an appropriate discount rate. Some economists, however, suggest that the capital asset pricing model has been empirically invalidated.
The concept of the stochastic discount factor (SDF) is used in financial economics and mathematical finance. The name derives from the price of an asset being computable by "discounting" the future cash flow x ~ i {\displaystyle {\tilde {x}}_{i}} by the stochastic factor m ~ {\displaystyle {\tilde {m}}} , and then taking the expectation. [ 1 ]