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Unformatted text preview: risk aversion 1. (The result holds for = 1 but needs to be derived differently.) Let P 1 and P 2 denote the prices of consumption in the two periods, and let W denote the value of lifetime income. Thus the budget constraint is . 2 2 1 1 W C P C P = + a) What are the utilitymaximizing choices of C 1 and C 2 as a function of W , P 1 , and P 2 ? b) The intertemporal elasticity of substitution is the elasticity of substitution between consumption in the two periods, defined as . ) / ln( ) / ln( 2 1 2 1 P P C C Show that the elasticity of substitution is 1 ....
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 Spring '10
 Feigenbaum
 Macroeconomics

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