Chapter_2_Exercises_Microfoundations

# Chapter_2_Exercises_Microfoundations - ε =-∞ we have...

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Econ 509 S. Parente Some Microfoundations for Macroeconomics 1. Consider the following utility function of a consumer. The consumer’s utility is defined over consumption and leisure by φ - = 1 ) , ( l c l c u The consumer’s only income is it’s wage income, which it spends entirely on consumption good, c. The consumer is endowed with 100 units of time. Find the consumer’s demand for consumption good, c and its supply of labor, 100-l. 2. Consider the following Constant Elasticity of Substitution (CES) utility function given by ε 1 2 1 2 1 ] ) 1 ( [ ) , ( c c c c u - + = . The elasticity of substitution is given by the value of 1/(1- ε ). Hence, when ε = 1, we have linear utility and perfect substitutes between the two goods. When
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Unformatted text preview: ε = -∞ , we have perfect compliments and indifference curves are right angles. Suppose the consumer has income equal to I. Derive the demand for c 1 and c 2 as a function of prices, p 1 and p 2 , and income, I. 3. Consider the following profit maximization problem of a firm. The firm produces output by renting capital and labor according the following production function. , > > = β α N K Y a. Find the firm’s demand for labor and capital and verify that they are decreasing function of rental prices. b. Determine the firm’s profits if α + β =1, α + β > 1 and α + β <1....
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## This note was uploaded on 03/16/2011 for the course ECON 509 taught by Professor Villamil during the Fall '08 term at University of Illinois, Urbana Champaign.

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