PSet8_F2011 - UNIVERSITY OF CALIFORNIA DEPARTMENT OF...

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

View Full Document Right Arrow Icon
UNIVERSITY OF CALIFORNIA Economics 202A DEPARTMENT OF ECONOMICS Fall 2011 M. Obstfeld/D. Romer Problem Set 8 Due in lecture, Thursday, December 1 1. Consider a consumer who lives for two periods. The consumer’s lifetime utility is U = u(c 1 ) + u(c 2 ), u’(·) > 0, u”(·) < 0. The consumer’s period-1 labor income, Y 1 , is certain, and is equal to The consumer’s period-2 labor income, Y 2 , is uncertain, with mean and variance . The consumer’s initial wealth is zero. a. Assume the consumer can borrow and lend at an interest rate of r = 0, and that there are no other financial assets. What is the first-order condition for c 1 ? For parts (b)-(d), assume that in addition to the safe asset with a real return of zero, there is a second, risky asset whose return has a mean and variance . The payoff to the risky asset is uncorrelated with Y 2 . b. Without using any math, explain in a sentence or two whether the consumer will purchase a strictly positive amount, a strictly negative amount, or none of this asset.
Background image of page 1

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

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/28/2012 for the course ECON 202A taught by Professor Akerlof during the Fall '07 term at University of California, Berkeley.

Page1 / 2

PSet8_F2011 - UNIVERSITY OF CALIFORNIA DEPARTMENT OF...

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

View Full Document Right Arrow Icon
Ask a homework question - tutors are online