This will be the denominator in all of our

Info iconThis preview shows page 1. Sign up to view the full content.

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

Unformatted text preview: arative statics using the general method. •  Our FOC can be written: •  This is our function •  Then we use the equation (where z is the parameter): 1011a – Lecture 8 14 The Denominator •  First, let us find . This will be the denominator in all of our calculations. c2 •  If this were not negative, then second order conditions would fail. •  The sign of a comparative static (with one endogenous variables) is always the sign of Vxz 1011a – Lecture 8 15 Changes in Income (I) •  Now, let us find . c2 •  Hence: 1011a – Lecture 8 16 Changes in Income (II) •  What about second period consumption? 1011a – Lecture 8 17 Changes in Income (III) •  So consumption rises in both periods when income rises. •  This means that both c1 and c2 are normal goods. •  You can see this must be the case just by examining the Euler equation (how?): u' (c1 ) = β (1 + r) u' (c 2 ) 1011a – Lecture 8 18 Changes in the Interest Rate (I) •  Recall that the interest rate is like the price of first period consumption in terms of second period consumption. •  So a rise in the interest rate corresponds to first period consumption getting more expensive. •  However, changes in the interest rate also changes your income. 1011a – Lecture 8 19 Changes in the Interest Rate (II) •  Let us find . c2 •  Hence: 1011a – Lecture 8 20 Changes in the Interest Rate (III) ...
View Full Document

This note was uploaded on 02/09/2013 for the course ECON 1010A taught by Professor Jeffreya.miron during the Spring '11 term at Harvard.

Ask a homework question - tutors are online