ECO 475 Homework 8 Jay H. Hong Due: Nov 11, 2009 1 Firms own capital and the consumers own the ﬁrms Consider the standard (deterministic) neoclassical growth model we studied. We have assumed that the consumers own capital and the ﬁrms are renting capital from consumers each period which makes ﬁrm’s problem static. This time let’s assume that ﬁrms own capital instead. Now the ﬁrm has to make a dynamic investment decision and we have to deﬁne a life-time expected proﬁt of ﬁrms. To close the model it is assumed that the consumers own shares of the ﬁrms. You may assume that the shares are tradable. Feel free to make any additional assumption if needed. (1) Deﬁne an ADE. (2) Deﬁne a SME. (3) Deﬁne a RCE. (4) Show that the equilibrium allocations from (1), (2), and (3) are identical. (5) Choose one of three equilibrium deﬁnition above and compare it with the corresponding equilibrium of standard case where consumers own capital. Are those two allocations identical? Discuss your result.
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