Handout1 - University of Minnesota Department of Economics...

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University of Minnesota Department of Economics Econ 3102: Intermediate Macroeconomics Handout 1 In this handout I would like to go in more detail into the ups and downs of Chapter 4. be analyzed later on . .. 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. To characterize the solution, we know that at an optimum, the marginal rate of substi-
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Handout1 - University of Minnesota Department of Economics...

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