Handout1 Representative consummer problem

Handout1 Representative consummer problem - University of...

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University of Minnesota Department of Economics Econ 3102 °002: Intermediate Macroeconomics 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. Speci°cally, I± ll go over the representative consumer±s problem; the representative °rm will 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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Note that (1) is a standard optimization problem. We usually consider Cobb-Douglas functional forms to represent the utility function.
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