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Suppose now that at time 1, before the household consumes c1, the pandemic occurs. As a result, household are told that they should be careful
Suppose now that at time 1, before the household consumes c1, the pandemic occurs. As a result, household are told that they should be careful when consuming in period 1, because they should stay at home. As are result of their health concerns, their utility for consuming today falls. We can write their new utility function as: Upandemic (c1, c2) = max log c1 log c2. {c1 ,c2 } The idea is that < 1 is a compensation for the fact that people don't want to spend in services (going out for dinner, movies, etc.) during the pandemic. We keep the assumption that y1 falls to 80 and assume that is 0.6. You can answer this question numerically or with a graph. Explain what would be the eect of the change in household savings. Could the eect of activating = 0.6that is, think of = 1 before the pandemic but 0.6 after the pandemiclead households to save more than they were saving before? How come they are saving even though they are earning much less at t = 1 than what they know they will earn in t = 2? Does the lack of
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