Which Scenario Represents Time Inconsistency

question 34

Multiple Choice

Which scenario represents time inconsistency?

• A) A person prefers $80 today to $100 one year from now but prefers $100 in six years to $80 in five years.
• B) You prefer receiving $2 on January 1 of this year to receiving $1 on January 2 of this year, and you prefer $2 on January 1 of next year to $1 on January 2 of next year.
• C) A person prefers $100 in one year to $80 today but prefers $100 in six years to $80 in five years.
• D) You value $1 today more than $1 tomorrow.

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Definitions:

Account

A record that summarizes all transactions related to a particular item or entity, used in financial accounting to track financial changes.

Dividends

Payments made by a corporation to its shareholders out of its profits.

Expenses

Costs incurred in the operation of a business to generate revenue.

Debit

An accounting entry that results in either an increase in assets or a decrease in liabilities on a company’s balance sheet.