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Unformatted text preview: h t to be equal to zero. On the other hand, as a result of working full time, h t = 1 , the worker's human capital would diminish at most at the rate δ . i) What is the present value of her lifetime earnings? ii) What are the state and control variables? iii) What is the equation of motion? iv) Write the dynamic optimization problem. 1 f ( X 1 ,X 2 ) f ( X 1 ,X 2 ) + v ( X 2 ) min[ f + v ] D E DF EF B 8 9 13 16 13 C 11 11 16 18 16 From the vantage point of stage 1, therefore, optimum paths and costs are: Path Cost BDF 13 CDF 16 We need only concern ourselves with the 2 paths listed in the table above. Thus we eliminate from consideration all the other paths. Stepping back to stage 0, we repeat the exercise. f ( X ,X 1 ) f ( X ,X 1 ) + v ( X 1 ) min[ f + v ] B C BDF CDF A 7 6 20 22 20 Thus the optimal path obtained by the recursive method is ABDF and the cost is 20. 4...
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 Fall '09
 Antoine
 Economics, Capital accumulation, ABDF

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