Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Consider the following version of the two-period consumption model. The consumer's preferences over current and future consumption (c and c) are: U(c,c)=ln(c)+ln(c) Recalling that we

image text in transcribed

Consider the following version of the two-period consumption model. The consumer's preferences over current and future consumption (c and c) are: U(c,c)=ln(c)+ln(c) Recalling that we denotes lifetime wealth, it can be shown that with these logarithmic preferences, the optimal consumption allocation is c=21we;c=21(1+r)we. The consumer's budget parameters are y=150;t=20,y=144;t=24,r=0.2, where y and y are current and future income, t and t are current and future lump-sum taxes, and r is the real interest rate. (a) Find lifetime wealth. Using the formula for logarithmic preferences, find the optimal levels of current consumption, future consumption and saving. (b) Confirm that the allocation you found is in fact optimal, by checking the tangency condition and budget constraint. (c) Note that if current consumption is c, future consumption must be c=yt+(1+r)(ytc). Confirm that the allocation you found in part (a) is in fact optimal, by completing the following table. Consider the following version of the two-period consumption model. The consumer's preferences over current and future consumption (c and c) are: U(c,c)=ln(c)+ln(c) Recalling that we denotes lifetime wealth, it can be shown that with these logarithmic preferences, the optimal consumption allocation is c=21we;c=21(1+r)we. The consumer's budget parameters are y=150;t=20,y=144;t=24,r=0.2, where y and y are current and future income, t and t are current and future lump-sum taxes, and r is the real interest rate. (a) Find lifetime wealth. Using the formula for logarithmic preferences, find the optimal levels of current consumption, future consumption and saving. (b) Confirm that the allocation you found is in fact optimal, by checking the tangency condition and budget constraint. (c) Note that if current consumption is c, future consumption must be c=yt+(1+r)(ytc). Confirm that the allocation you found in part (a) is in fact optimal, by completing the following table

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Accounting Practice And Principles

Authors: Jan Bebbington, M. Richard Laughlin, Robert H. Gray, Gray Dave

3rd Edition

1861527713, 978-1861527714

More Books

Students also viewed these Accounting questions

Question

Describe five of G. Stanley Halls major achievements.

Answered: 1 week ago

Question

What are the general types of interviews? Explain each.

Answered: 1 week ago

Question

6 How can HRM contribute to ethical management and sustainability?

Answered: 1 week ago