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Set 3. Recall that each period the firm rents capital and hires labor hours so as to maximize profits. Introduce ut, as the rate of

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Set 3. Recall that each period the firm rents capital and hires labor hours so as to maximize profits. Introduce ut, as the rate of capital utilization. Let V(ut) be a cost function, specifically the function that governs capital utilization costs. Let V(ut)=61ut2. Let At denote the exogenously given technology level that is subject to stochastic shocks. Assume A=1 and that expectations of the next period evolution of the technology level is Et[Al+1]=A. Let the production function be given by yt=At(utkt)ant1 with 0

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