eco200_problemset2_2009 - UNIVERSITY OF TORONTO Faculty of...

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

View Full Document Right Arrow Icon
UNIVERSITY OF TORONTO Faculty of Arts and Science November 2009 PROBLEM SET 2 1 ECO200 - Section L0101 Carlos J. Serrano NOTE: THE DUE DATE OF PROBLEM SET 2 IS WEDNESDAY NOVEMBER 18, 2009 AT 2.00PM IN CLASS. ROOM LM 159 Question 1. (25 points) [Intertemporal consumption and taxes on savings returns] Consider an economy populated with individuals that last two periods. In period 1 the in- dividual is young, in period 2 the individual is old. The utility function of any individuals is ( 1   2 ) =  ( 1 )+ ln( 2 ) , where 1 and 2 represent consumption in period 1 and period 2, and (0 1) is a discount factor. Suppose that the individual earns 1 0 and 2 0 in period 1 and 2, respectively. Suppose that an individual can borrow or save in capital markets at the rate of interest   0 . Finally, suppose (as we did in the model we covered in class) that the nominal prices of consumption in each period are constant and are 1. The marginal utilities of consumption in period 1 and period 2 are  1 = 1  1  2 =  2 (a) Suppose that 1 = $100 , 2 = $50 , = 0 1 (i.e., 10%), and = 1 1+ . Write the utility maximization problem (including the utility function and a budget constraint in period 1 dollars? Calculate the optimal consumption in period 1, 1 , and in period 2, 2 What is the level of utility at ( 1   2 )?
Image of page 1

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

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern