University of Minnesota
Department of Economics
Handout 1
(Last revised: September 23)
In this handout I would like to go in more detail into the ups and downs of Chapter 4.
be analyzed later on .
..
1 The representative consumer±s problem
In class we described the representative consumer±s optimization problem as maximizing
some utility function
U
(
C;‘
)
subject to the budget constraint
C
=
w
(
h
‘
) +
T:
We would certainly like to have
C
±
0
. (What would a negative consumption mean,
anyway?) Also, we have to abide by the restriction
0
²
‘
²
h
. Formally, our optimization
problem is:
max
C;‘
U
(
C;‘
)
(1)
subject to
C
=
w
(
h
‘
) +
T
C
±
0
0
²
‘
²
h:
1
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View Full DocumentNote that (1) is a standard optimization problem.
We usually consider CobbDouglas functional forms to represent the utility function.
To characterize the solution, we know that at an optimum, the marginal rate of substi
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 Spring '08
 Staff
 Economics, Macroeconomics, Optimization, representative

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