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Consider the human capital growth model with the representative consumer who lives in two periods (0, 1). The efficiency parameter of human capital accumulation technology

Consider the human capital growth model with the representative consumer who lives in two periods (0, 1). The efficiency parameter of human capital accumulation technology is b = 4.5. The total productivity factor is given by z = 3 in period 0 and z = 1.5 in period 1. Denote by Ht the human capital accumulated in period t, and by u the time spent working in period t. Assume the initial human capital is H0 = 3.

1. Compute C0, C1 as functions of u.

2. Assume the consumer is willing to maximize the lifetime utility function,

LU = ln(C0) + (ln(C1))/ (1 + r)

where r = 0.1 is the real interest rate. Give the optimal value of u?

3. Assume some massive investment in the education system made by the government increases b to 5. How will this policy affect the optimal u of the consumer? Quantify the implication of this policy for the long-term consumption growth.

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