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Unformatted text preview: Econ 387L: Macro II Spring 2008, University of Texas Instructor: Dean Corbae Problem Set #7- Due 3/25/08 I. The first problem introduces you to dynamic programming in a finite T horizon stochastic growth model. Specifically, let T = 1 (i.e. a two period model). Let z t Z (a finite and time independent set) denote an exogenous technology shock in period t and ( z t , z t 1 ) denote the probability of being in state z t conditional on being in state z t 1 . Let capital holdings at the beginning of period t be denoted k t X and the state variable be denoted s t = ( k t , z t ) X Z . Let y ( s t ) = z t f ( k t ) denote output in state s t where f (0) = 0 , f > , f 00 < , c ( s t ) denote consumption in state s t , and k t +1 ( s t ) denote capital chosen in state s t used for production next period. Households start with k units of capital. Households are expected utility maximizers with preferences that satisfy u ( c ) > , u 00 ( c ) < , discount the future at rate , and have a uniform prior before period...
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This note was uploaded on 08/06/2008 for the course ECON 387 taught by Professor Corbae during the Spring '07 term at University of Texas at Austin.
- Spring '07