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Unformatted text preview: s represents the saving (or borrowing if negative) decision of the household when young. R is the gross interest rate that is applied to the saving (or borrowing) between period young and old. (i) Write the Lagrangean associated with the household maximization problem. Make sure to specify all the constraints which the maximization is subject to. (ii) Suppose that e > . Can you apply the Kuhn-Tucker results (KT.1) and (KT.2) that we have seen in class to characterize the solution to the maximization problem? Suppose now that e = 0 . Would your answer change? 1 (iii) In answering this question assume that e > . Describe the solution to the household optimization problem as carefully as you can. In particular, make sure to consider whether the solution changes under the following cases: 1 < R , 1 = R and 1 > R . 2...
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- Summer '07