# Then think about whether it is in present value or

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Unformatted text preview: hink about whether it is in present value or future value. – – This is future value. This is present value. A4) If we put c2 on the vertical axis, what is the slope of the budget constraint? Solving the budget constraint for , we have: The slope is: – , or A5) Set up her optimization problem as a Lagrangian and derive the first order conditions. , , First Order Conditions: 1 2 3 A6) What is her marginal rate of substitution? A7) Solve the three equations for the derived demand for c1 and c2. Divide (1) by (2) Substitute this into (3), the budget constraint: In a similar way, find ***Not in your question set, but here are examples of comparative statics to analyze the effect of possible changes in exogenous factors on endogenous variables, c1, c2, and s. How does demand for c1 and c2 change with a change in the interest rate, r? In other words, find , and interpret these comparative static results. An increase in the interest rate, reduces period one consumption and increases period 2 consumption (it increases the incentive to save). How does demand for c1 and c2 change with a change δ? In other words, find , and interpret these comparative static results. An increase in δ reduces period one consumption and increases period 2 consumption (...
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## This lab report was uploaded on 04/06/2014 for the course ECON 301 taught by Professor Corinnelanginier during the Fall '07 term at Iowa State.

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