Recitation_3_F09

# Recitation_3_F09 - 1 14.02 Recitation 3 Consumption and...

This preview shows pages 1–2. Sign up to view the full content.

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

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 1 14.02. Recitation 3. Consumption and Investment 1.1 Consumption & Consider an agent who lives for two periods. In the &rst period she has an endowment of y + a goods(where a are assets, and y is current income). In the second period (future) she has an endowment of y f goods. & Flow budget constraints c + s = y + a ; c f = s (1 + r ) + y f & Combining these two ¡ow budget constraints into a single one: PV LC ¡ c + c f 1 + r = y + a + y f 1 + r ¡ PV LR & Note: relative price of c f is 1 = (1 + r ) ; relative price of c is 1 + r . & Preferences given by U & c;c f ¡ = ln( c ) + & ln & c f ¡ ¡ u ( c ) + &u & c f ¡ & Agent¢s problem: current vs. future consumption max c;c f ln( c ) + & ln & c f ¡ s.t. c + c f 1 + r = y + a + y f 1 + r & Ratio of FOCs (called Euler equation) Mu ( c ) = & (1 + r ) Mu & c f ¡ () (1 + r ) &c = c f & Combine with intertemporal budget constraint to &nd solutions c = 1 1 + & ¢ y + a + y f 1 + r £ ; c f = & 1 + & ¤ (1 + r ) ( y + a ) + y f ¥ & If & (1 +...
View Full Document

## This note was uploaded on 10/25/2009 for the course 14 14.02 taught by Professor Geurrieri during the Fall '09 term at MIT.

### Page1 / 2

Recitation_3_F09 - 1 14.02 Recitation 3 Consumption and...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online