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exercise2 - EC 813A Exercise 2 Please hand in on Friday...

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EC 813A. Exercise 2. Please hand in on Friday September 26th. 1) ( Non-Tradable Inputs ). Consider a small open economy that lasts for two periods ( t =1 , 2 ). The economy can trade bonds with the rest of the world at the interest rate r . The population consists of homogeneous households-farmers. Households can produce tomatoes using cattle to farm their land. Cattle is the only input for the production of tomatoes. If cattle is used in production it depreciates completely (dies). Cattle can also be kept idle in the f rst period and used for production in the second period (investment). Cattle cannot be reproduced and cannot be traded with the rest of the world. Agents’ lifetime utility is ln C T 1 + β ln C T 2 (1) where C T t stands for the amount of tomatoes eaten at time t. At each date the production function for tomatoes is T t = Ca α t (2) The economy has an initial stock of cattle in period 1 of Ca 1 andth isisthe only endowment of the economy .
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