Pset5_F2011 - UNIVERSITY OF CALIFORNIA DEPARTMENT OF...

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UNIVERSITY OF CALIFORNIA Economics 202A DEPARTMENT OF ECONOMICS Fall 2011 M. Obstfeld/D. Romer Problem Set 5 Due in lecture Tuesday, November 8 1. The basic model of consumption under uncertainty (with quadratic utility, and uncertainty only about labor income) predicts that: A. The change in income will not be predictable on the basis of past changes in consumption. B. The change in consumption will not be predictable on the basis of past changes in income. C. The change in consumption will not be correlated with the current change in income. D. (A) and (B). E. (A) and (C). F. (B) and (C). 2. (Consumption with state-contingent goods.) Consider a consumer whose labor income (which he or she takes as exogenous) is uncertain. Specifically, the consumer’s labor income in state s in period t is Y st . The probability that the state in period t is s is π st . Thus, for each t , . The realization of the state each period is independent of the realization in all other periods. The consumer seeks to maximize
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Pset5_F2011 - UNIVERSITY OF CALIFORNIA DEPARTMENT OF...

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