# PS1 - Econ 277A Winter 2011 Problem Set 1 Due no later than...

This preview shows pages 1–2. Sign up to view the full content.

Econ 277A Winter 2011 Problem Set 1 Due no later than 1/27 Problem 1 Suppose Kory is going to live for two periods. His lifetime utility is the sum of his period 1 and 2 utility, ln(1 + c 1 - r 1 ) + ln(1 + c 2 - r 2 ) . His budget constraint is c 1 + c 2 1. He is born with a ﬁxed r 1 [0 , 1], r 2 is determined by r 2 = γc 1 + (1 - γ ) r 1 , where γ [0 , 1] is a parameter. a Brieﬂy interpret these preferences. How do each period’s preferences compare to the reference-dependent preferences we’ve been studying? Comment on one or two unre- alistic aspects of these preferences. b Solve for Kory’s optimal consumption proﬁle ( c * 1 ,c * 2 ), as a function of r 1 and γ . c Interpret. This includes commenting on the predicted values when γ = 0 and γ = 1, and the comparative statics. When is c 1 * > c * 2 ? Problem 2 Suppose people are told about the contents of two urns: Urn 1 contains 100 balls, some of which are red and some of which are black. Urn 2 contains 100 balls, of which 50 are red and 50 are black.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 2

PS1 - Econ 277A Winter 2011 Problem Set 1 Due no later than...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online