assignment2 - Economics 302 - Macroecononomic Theory II...

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Unformatted text preview: Economics 302 - Macroecononomic Theory II Fall 2008 Jean-Paul Lam Assignment 2 Answer all question as completely as possible. Explain your answer carefully and show all your work. This assignment is due on Thursday October 30 in class. 1. Consider the following OLG model with a constant population. Agents live for two periods. They receive an endowment of one unit of time when young and spend all their time working at a wage rate w t . Agents when old cannot work and therefore can finance their consumption by saving when they are young. The return earned on any savings made in period t is given by (1 + r t +1 ). Each agent has the following utility function: U ( c 1 t , c 2 t +1 ) = ln c 1 t + β ln c 2 t +1 , < β < 1 (1) where β is a discount factor (i) What are the budget constraints of an agent in this economy. [2 marks] (ii) Find the optimal level of consumption when young ( c 1 t ) and when old ( c 2 t +1 ) [4 marks] (iii) Suppose that the government imposes a lump-sum tax τ on the old only. One economist argueson the old only....
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This note was uploaded on 06/21/2009 for the course ECON 302 taught by Professor Jean-paullam during the Fall '08 term at Waterloo.

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