Suppose Andrew is deciding on buying a new bike for exercise. There are three periods: Period 0 Andrew decides whether to buy the bike or not. The cost of the bike is equal to P utility units. (u0(buy) = P ) Period 1 If Andrew has bought the bike, then he has to decide if he is going out for a ride. If he goes for a ride, then his effort generates a utility cost of E units of utility. (u1(ride) = E) Period 2 If Andrew has bought the bike and has ridden on it, then a health benefit equivalent to B utility units accrues. (u2(ride) = B)

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In this scenario Andrew is considering buying a new bike for exercise and there are three periods in... View the full answer