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econ 325 notes - endowment point then the consumer is a...

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1/4/10 For this class: log c = ln c lagrangian constraint + (y –p1c1 – p2c2) - (p1c1 + p2c2 – y) make economic decisions on real wages (w/p) If real wage increases, income effect on c increases and income effect of l increases If real wage increases, substitution effect on c increases, but substitution effect on l decreases L= leisure? C=consumption? Endowment point- point at which real wage in period one meets real wage in period two on the slope line. If optimization point is below endowment point then the person is a borrower. In this situation, consumer has negative savings. If optimization point is above
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Unformatted text preview: endowment point then the consumer is a lender. I= nominal interest rate in dollars R= real interest rate in terms of goods 1 + r = (1 + i) / (1 + pi) p1c1 + (p2c2/(1+i)) = (y1)+ y2/(1+i) c1 + (p2/p1(1+i))c2 = (y1/p1) + y2/(p1(1+i)) Sept 18 – p. 29 – close to question in problem set When lump sum use additive terms When restrictive then use budget constraint Net rate of return-(S(t + 1) + D(t+1) – S(t))/S(t) S(t) = [Beta * lambda(t+1) / lambda(t)] * [S(t+1) + D(t+1)] Question 4.a of problem set: t1=1.78...
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