Q.1 You are a hyperbolic discounter. Your discount rate between year t and t+1 is given by 0.5/(1+t) for t=0 (today) , 1 next year, 2, 3 ...This means discount rate between today and a year from now is 0.05 (5%) and 2 years from now it is 0.025 and so forth.
You are considering an investment in energy conservation (better insulation in your house) that has a lifetime of 5 years. It will cost you $130 to install and reap benefit in terms of energy saved of $10 in year 1, $20 in Year 2, $30 in year 3, $40 in year 4, $50 in year 5.
a) What is the net present value of the energy savings? Is the insulation a good investment for you?
b) Would the insulation be a good investment for you if your discount rate were a constant 5% over the 5 years?
c) What would be a discount rate used by a bio-centric consumer