Question

what does it mean when someone have a higher discount rate in doing something than the...

what does it mean when someone have a higher discount rate in doing something than the other?

Homework Answers

Answer #1

A discount rate is what someone uses to ascribe a value on the present as compared to the future. If the discount rate is 0, then you would be ok with receiving $100 today versus receiving it next year. If, however, the discount rate is 10%, you would want $110 next year if you were to forego $100 now. If the discount rate is 20%, you would want $120 next year if you were to forego $100 now.

In other words, you are indifferent between

X amount today, and

X*(1+r) amount one year later, where r = rate of discount

Hence you can say when someone has a higher discount rate, they value today more than future as compared to someone whose discount rate is lower.

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