{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

TAsections01

TAsections01 - Econ 110 TA sections 1 Problem 1 1 v(c2 1...

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

Econ 110 TA sections January 14, 2009 1 Problem 1 Suppose the household in the two-period model has the utility function u ( c 1 ; c 2 ; l 1 ; l 2 ) = v ( c 1 ) + 1 1 + ° v ( c 2 ) + ( l 1 ; l 2 ) where v ( c ) = c 1 ° ° ° 1 1 ° ± and ( l 1 ; l 2 ) is some unspeci°ed function of l 1 and l 2 . The constants ° and ± are both assumed to be positive. (a) What is the household±s marginal rate of substitution between c 1 and c 2 ? (b) Assuming that the interest rate, R , is equal to ° , how will c 1 compare to c 2 ? What is the growth rate of consumption between periods? (c) If the interest rate rises to some R 0 > R what happens to the growth rate of consumption? How does your answer depend on the value of ± ? 2 Problem 2 It is quite common in macroeconomics to assume that households are impatient ... that other things equal, they prefer to consume sooner rather than later. Suppose the household±s utility function is u ( c 1 ; c 2 ; l 1 ; l 2 ) = ln ( c 1 ) + ² ln ( T ° l 1 ) + 1 1 + ° [ln ( c 2 ) + ² ln ( T ° l 2 )] where c 1 + c 2 1 + r = w 1 l 1 + w 2 l 2 1 + r In this example we assume that ° > 0 .

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.

{[ snackBarMessage ]}