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Consider an economy in which a representative household lives for two periods (year t and year t 1). The representative household derives utility from consumption
Consider an economy in which a representative household lives for two periods (year t and year t 1). The representative household derives utility from consumption and discount the future at rate . The households life time utility is given by: U=lnct (Beta)lnct 1 The household receives income from work in both period yt and yt 1 respectively and has no financial wealth. The inter-temporal budget constraint for an household can be written in present discounted values as ct ct 1 =yt yt 1 1 R 1 R where you can interpret yt 1 as expected income. a) (5 marks) Write down the maximization problem in a lot of detail. b) (10 marks) Derive the optimal conditions to obtain the Euler Equation. c) (5 marks) Interpret the Euler Equation
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