Lesson plan
Discount function
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 having a negative first derivative and with (or in continuous time) defined as consumption at time , total utility from an infinite stream of consumption is given by: U\Bigl( \{c_t\}_{t=0}^\infty \Bigr) = \sum_{t=0}^\infty {f(t)u(c_t)} Total utility in the continuous-time case is given by: U \Bigl( \{c(t)\}_{t=0}^\infty \Bigr) = \int_{0}^\infty {f(t)u(c(t)) dt} provided that this integral exists. Exponential discounting and hyperbolic discounting are the two most commonly used examples.
Article summary
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 having a negative first derivative and with (or in continuous time) defined as consumption at time , total utility from an infinite stream of consumption is given by: U\Bigl( \{c_t\}_{t=0}^\infty \Bigr) = \sum_{t=0}^\infty {f(t)u(c_t)} Total utility in the continuous-time case is given by: U \Bigl( \{c(t)\}_{t=0}^\infty \Bigr) = \int_{0}^\infty {f(t)u(c(t)) dt} provided that this integral exists. Exponential discounting and hyperbolic discounting are the two most commonly used examples.
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Discussion questions
- Summarise the article in your own words. Which single claim would you verify first, and why?
- Which claim in this article is most likely to be revised as the sources update? How would you check its current status?
- If two sources disagreed about one of these facts, what would you need in order to trust one over the other?
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