Constant Rate Discounted Utility Model

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DISCOUNTED UTILITY MODEL- Constant rate discounted utility models are commonly used to represent individual inter temporal preference in health care program evaluation. The mainly questions is of what rate of discount is used and the little attention has been paid to the appropriateness of the constant rate of discounted utility model. In discounted utility model, the utility of consumption is evaluated afresh in each time period. The discounted utility model is a factor that dominant model of inter temporal choice. Where consumption now is even greater than consumption later. Although Adam Smith was the first economist to discuss the importance of inter temporal choice as far as the wealth of nation was concerned, it was Rae who essentially…show more content…
In the discounted utility model, it is implicitly assumed that there is no satiation due to consumption that is carried over across time periods. Thus the utility of consumption in a period remains unaffected by the consumption in the previous period. So the assumption that the utility in each period is computed afresh may be reasonable if the time interval between two periods is relatively large. Thus the total utility is simply the sum of the discounted utilities. The problem automatically arises when the time interval between two periods is relatively small and there is a lingering effect of previous consumption on the experienced utility of the current consumption. In such cases the discounted utility model will over state the total utility. In order to see the problem we address the following example, we will assume that the utility function is strictly concave, representing diminishing marginal utility of consumption. If we set the time interval between periods to change the time unites then the appropriate discount and satiation factors will change over time period respectively and in doing so we can fix the number od periods. Thus the time span of the model will change too. The DUM has eight primary features: integration of new alternatives with existing plans, utility independence, consumption independence, stationary instantaneous utility, stationary discounting, constant discounting, independence of discounting from consumption, diminishing marginal utility, and positive time preference. It compressed the influences of all factors affecting time preference into a single parameter, which is the discount rate, thus the originator of the DUM who is the Samuelson never intended the model to be either normative or
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