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Unformatted text preview: 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 households 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 > 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 households utility function is u ( c 1 ; c 2 ; l 1 ; l 2 ) = ln ( c 1 ) + ln ( T & l 1 ) + 1 1 + & [ln (...
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