{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

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

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

View Full Document Right Arrow Icon
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 .
Background 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 ]}