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Econ 242 Problem Set 4: U (C (T) ) e DT

This document contains an economics problem set with multiple questions about intertemporal optimization problems. It asks the student to: 1) Derive the conditions that characterize the solution for an individual maximizing utility from consumption over time, subject to a budget constraint. Consumption grows over time. 2) Consider a similar problem where an individual allocates time to leisure and work to maximize utility from consumption and leisure. It asks the student to derive conditions and growth rates. 3) Analyze the dynamic effects of changes in parameters like the elasticity of intertemporal substitution and total factor productivity in an economic growth model.

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42 views3 pages

Econ 242 Problem Set 4: U (C (T) ) e DT

This document contains an economics problem set with multiple questions about intertemporal optimization problems. It asks the student to: 1) Derive the conditions that characterize the solution for an individual maximizing utility from consumption over time, subject to a budget constraint. Consumption grows over time. 2) Consider a similar problem where an individual allocates time to leisure and work to maximize utility from consumption and leisure. It asks the student to derive conditions and growth rates. 3) Analyze the dynamic effects of changes in parameters like the elasticity of intertemporal substitution and total factor productivity in an economic growth model.

Uploaded by

keyyongpark
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Econ 242 Problem Set 4

Prof. Gustavo Ventura 1. Consider the following simple intertemporal optimization problem. Time is continuous. An individual lives for t [0, T ]. He/she solves max
T

c(t)[0,T ] 0

u(c(t)) et dt

subject to (t) = rk (t) c(t) k k (T ) = 0 k (0) > 0 where k stand for individual assets, c for consumption. The rate of return on assets (r) and the rate of time preference () are both positive. The utility function u(.) belongs to the constant elasticity of intertemporal substitution class: u(c) = c1 , 1 > 0, = 1

1. Derive the conditions that characterize the solution of the individual problem. What is the growth rate of consumption over time?

2. Describe the eects of an increase in on the optimal path for consumption. How does consumption at the start of life change with . Explain. 2. Consider the following simple intertemporal optimization problem. Time is continuous. An individual lives t [0, T ] and is endowed with one unit of time, that can be used for leisure (h) or market work (l) at any age (l + h 1). If he/she works, he/she receives the (constant) wage w per unit of time worked. The problem of the individual is thus max
T

c(t)[0,T ] 0

u(c(t), h(t)) et dt

subject to (t) = rk (t) + wl(t) c(t) k k (T ) = 0 where k are the assets of the individual and r is the (constant) rate of return on assets. Preferences for consumption and leisure are represented by the utility function u(c, h) = log(c) + log(h). For simplicity, assume that the initial amount of assets is zero, and that parameter values are such that the individual always work (l(t) > 0 for all t [0, T ]). 1. Derive the conditions that characterize the solution of the individual problem. What are the growth rates of consumption and leisure over time? (Hint: notice that this is a problem with two control variables and one state variable). 2. If r > , will the individual work more or less hours at the start of his economic life relative to the end? 3. In the context of the Ramsey-Cass-Koopmans model, analyze the dynamic eects of: 1. a permanent decrease in the elasticity of intertemporal substitution (increase in ). 2. a permanent increase in TFP. 2

4. Consider the Ramsey-Cass-Koopmans model. Technology is represented by a Cobb-Douglas production function with capital share . Population grows at the rate n and the eciency of labor grows at the rate g . 1. Suppose that n increases. What are the eects on the steady state capital to output ratio? Explain. 2. Suppose that g increases. What are the eects on the steady state capital to output ratio? Explain. 3. Discuss the following statement: Everything else equal, higher rates of labor augmenting technical progress imply higher aggregate saving rates, whereas higher rates of population growth imply lower aggregate saving rates.

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