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

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
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
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
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
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/02/2009 for the course ECON 3140 taught by Professor Mbiekop during the Spring '07 term at Cornell.

Page1 / 6

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

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online