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Unformatted text preview: by (2)(3) after substituting c ( , 1 ) = c 1 ( ) . 2. Transform (1)(4) into a cost minimization problem over choice of current utility u and promised future utility w (as in Homework #1). Does the transformed problem necessarily have a convex constraint set? Under what conditions on utility functions is the constraint set for the transformed problem convex? Suggestion: Try CARA preferences. 1 3. Suppose the conditions which you stated in part 2 are not met, is there a way to convexify the constraint set? Suggestion: See Phelan, C. and R. Townsend (1991) &Computing MultiPeriod, Information Constrained Optima, Review of Economic Studies , Vol. 54, p. 599617. 2...
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 Spring '07
 CORBAE
 Economics

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