OE2_SOL

OE2_SOL - Suggested Solution to Prelim 2 1. We know the...

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Suggested Solution to Prelim 2 1. We know the asset market equilibrium condition is given by: i t = r t 1 unit of good: renting gives 1 + r t at the end of t so 1 + r t at the start of t + 1 : 1 unit of good: lending gives 1 + i t at the start of t + 1 : If r t =4% and i t = 5%, then everyone lends his good in the bond market to enjoy the better rate of return. So no one rents in the rental market. So no capital input, which means MPK (which is also the r t to be less than 5. (10 Points) 2. max U ( c 0 ;c 1 ) = c 0 + c 1 s.t 2 c 0 + c 1 = 1 Write c 1 = 1 2 c 0 Substituting c 1 in terms of c 0 in the utility function, we get a function of only c 0 given by: f ( c 0 ) = 1 c 0 So now maximizing f ( c 0 ) with respect to c 0 we see the the utility is maximized when c 0 = 0 , since for any c 0 > 0 , the utility is less than 1. Hence substituting for c 0 = 0 in the budget constraint, we get c 1 = 1 : = ) optimal ( c 0 ;c 1 ) = (0 ; 1) : (10 Points) Those who have taken derivative for a linear function after repeatedly going over this in section lose 4 points straight. 1

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3. u ( c yt ;c ot +1 ) = ln c ot +1 Given: N = 10 , = 0 : 5 , A t = 4 for all t , and K 0 = 90 : Public Service: G = 10 = ) g = G=N = 10 = 10 = 1 : and k 0 = K 0 =N = 90 = 10 = 9 : a [(1)] b G ( z yt ;z ot ) = (0 ; 1) for all t: Since the old are taxed each period, and the young are not taxed
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This note was uploaded on 04/02/2009 for the course ECON 3140 taught by Professor Mbiekop during the Spring '07 term at Cornell.

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OE2_SOL - Suggested Solution to Prelim 2 1. We know the...

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