Kyle and Dorothee are friends. Even though they share a vast range of interests, Kyle is a hyperbolic discounting economic agent and Dorothee is an exponential one. The following table has the discounting factors of both.

a) Kyle and Dorothee decide to strike a deal. A year from now Dorothee will loan $1,000 to Kyle, and in return Kyle will give $1,100 back to Dorothee 2 years from now. Is this deal acceptable on both sides at time 0, given the discounting factors specified above? b) Would the deal go through if Kyle would pay $1,000 in 2 years? How about $1,200? What is the minimal sum Kyle is willing to give Dorothee so that the deal will be acceptable on both sides? c) Suppose that the deal from (a) went through. Now a year has passed and Dorothee comes up to Kyle with the following suggestion. Instead of going through with the original contract, Kyle will pay Dorothee $400 and Dorothee will tear the contract up. Will Kyle agree to this kind of trade? What will happen if Dorothee asks for $500? And how about $200?

Time 0 1 2 Hyperbxdie Discounting Factor 1 0.9 0.81 Exponential Discounting Factor 1 0.56 0.54 Time 0 1 2 Hyperbxdie Discounting Factor 1 0.9 0.81 Exponential Discounting Factor 1 0.56 0.54