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Consider the following 2-period model of a closed economy with a representative household and competitive firms. The household has logarithmic utility from consumption (Ct in
Consider the following 2-period model of a closed economy with a representative household and competitive firms. The household has logarithmic utility from consumption (Ct in period t) and a quadratic disutility of work (Lt) : log(C1)(L1)2+[log(C2)(L2)2],00 Firms maximize profits (YtwtLt) in each period. In equilibrium we have Ct=Yt in each period. (a) What are the equilibrium values of the real wage and output? (b) What is the equilibrium value of the real interest rate? (c) Consider the equilibrium you get with A1=A2 and compare it to the one you get with A10 Firms maximize profits (YtwtLt) in each period. In equilibrium we have Ct=Yt in each period. (a) What are the equilibrium values of the real wage and output? (b) What is the equilibrium value of the real interest rate? (c) Consider the equilibrium you get with A1=A2 and compare it to the one you get with A1
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