homework8 - ECO 475 Homework 8 Jay H. Hong Due: Nov 11,...

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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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