Consider a representative individual who lives for TWO periods. The individual is endowed with one unit...
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Consider a representative individual who lives for TWO periods. The individual is endowed with one unit of labour in each period of his/her life. The individual consumes in both periods and his/her instantaneous utility function is given by: ut In {c (14)-} where 0 < a < 1, u = utility at time t, c = consumption at time t, l = labour supply at time t. Denote the wage rate in periods 1 and 2 by w and w, respectively. Also, define r to be the interest rate. (a) Set up a constrained maximization problem for the individual. [10 marks] (1-1) (b) Solve the constrained maximization problem in part (a). Does the ratio (1-1) depend on w, W and r? If yes, then explain how. [20 marks] (c) Suppose a positive technology shock happens in period 1 and the same shock prevails for TWO periods. How will the ratio (1-1) in part (b) change? Explain. [10 (1-1) marks] (d) Explain how would the individuals substitute their labour between the periods? How will it affect the total output in the economy? [10 marks] Consider a representative individual who lives for TWO periods. The individual is endowed with one unit of labour in each period of his/her life. The individual consumes in both periods and his/her instantaneous utility function is given by: ut In {c (14)-} where 0 < a < 1, u = utility at time t, c = consumption at time t, l = labour supply at time t. Denote the wage rate in periods 1 and 2 by w and w, respectively. Also, define r to be the interest rate. (a) Set up a constrained maximization problem for the individual. [10 marks] (1-1) (b) Solve the constrained maximization problem in part (a). Does the ratio (1-1) depend on w, W and r? If yes, then explain how. [20 marks] (c) Suppose a positive technology shock happens in period 1 and the same shock prevails for TWO periods. How will the ratio (1-1) in part (b) change? Explain. [10 (1-1) marks] (d) Explain how would the individuals substitute their labour between the periods? How will it affect the total output in the economy? [10 marks]
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a Set up a constrained maximization problem for the individual The individuals problem is to maximize their lifetime utility subject to their budget c... View the full answer
Related Book For
Multinational Business Finance
ISBN: 978-0132743464
13th edition
Authors: David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett
Posted Date:
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