IH1_PSA

IH1_PSA - Problem Set 3: Innite Horizon Model Econ720. Fall...

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Econ720. Fall 2009. Lutz Hendricks 1 Land Prices with Capital Accumulation Consider the following economy with land and capital. There is a single good produced from land L and capital K according to K t +1 = A F ( K t ; L t ) + (1 ) K t c t (1) where A is an exogenous productivity factor, is the depreciation rate of capital, and c is consumption. The production function has constant returns to scale. Production takes place in a r t and q t . The purchase price of land is p t . The aggregate endowment of land, L A single representative household orders consumption sequences according to P 1 t =0 ± t u ( c t ) . He receives income only from holding capital and land. (c) Determine the e/ects of the following changes on steady state prices and quantities. A qual- itative characterization is su¢ cient (which variables increase²decrease?): L increases, A increases. 2 Wealth in the utility function utility from holding wealth. The representative household solves
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IH1_PSA - Problem Set 3: Innite Horizon Model Econ720. Fall...

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