ps3325 - Professor M Alexopoulos Department of Economics...

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Professor M. Alexopoulos Department of Economics 150 St. George St. Rm: 205 Tel: 978-4962 email: [email protected] ECO325: Advanced Economic Theory-Macro Problem Set #3 1. Consider an individual who lives for two periods with preferences given by U c 1 , c 2 u c 1 1 1 u c 2 where u c is the felicity (one period utility) function and is the subjective rate of time preference. Each period he inelastically supplies 1 unit of labour to firms and receives w 1 when young (i.e. in period 1) and w 2 when old (i.e., in period 2). Assume that he inherits A units of wealth when he is young and is committed to leaving a bequest of B to his children when he is old. a. What is the budget constraint in period 1? in period 2? (Let r be the rate of return on savings between period 1 and 2.) b. What is the lifetime budget constraint of the individual when r is the rate of return on savings between period 1 and 2?
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