section+23 - ECON 101B: Section 23 Handout Date: 04/13/2011...

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ECON 101B: Section 23 Handout Date: 04/13/2011 Question 1 This exercise will guide you through the derivation and understanding of Irving Fisher model of intertemporal consumption choice. Suppose that a representative consumer lives for two periods and receives an endowment (income not related to labor market participation) Y 1 = $100 Y 2 = $110 in the second period. The r = 10% . The consumer±s preferences between consumption in period one, C 1 , and that in period two, C 2 , are represented by the following utility function. U ( C 1 ; C 2 ) = ln C 1 + ln C 2 1. What is the consumer±s budget constraint? 2. What does this parameter tell us? What is the set of values, in your opinion, that can take? 3. Write down the optimization problem the consumer faces and derive the restriction on consumption in two periods necessary to maximize the consumer±s utility. 4. Suppose
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section+23 - ECON 101B: Section 23 Handout Date: 04/13/2011...

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