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Marcin Bielecki, Advanced Macroeconomics IE, Spring 2019 Homework 5 - One Sector Growth Models

This document outlines three problems related to one-sector growth models. Problem 1 considers a Ramsey-Cass-Koopmans economy and derives the first order conditions for households and firms. It also finds the conditions for general equilibrium and the steady state levels of capital and consumption. Problem 2 examines an economy with learning-by-doing externalities, deriving the first order conditions and describing general equilibrium. It also analyzes the long run stability and behavior over time. Problem 3 models an economy where production depends on government spending. It derives the first order conditions for households and firms, describes general equilibrium, and examines the social planner's problem.

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112 views2 pages

Marcin Bielecki, Advanced Macroeconomics IE, Spring 2019 Homework 5 - One Sector Growth Models

This document outlines three problems related to one-sector growth models. Problem 1 considers a Ramsey-Cass-Koopmans economy and derives the first order conditions for households and firms. It also finds the conditions for general equilibrium and the steady state levels of capital and consumption. Problem 2 examines an economy with learning-by-doing externalities, deriving the first order conditions and describing general equilibrium. It also analyzes the long run stability and behavior over time. Problem 3 models an economy where production depends on government spending. It derives the first order conditions for households and firms, describes general equilibrium, and examines the social planner's problem.

Uploaded by

albertammons
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Marcin Bielecki, Advanced Macroeconomics IE, Spring 2019

Homework 5 – One Sector Growth Models


Problem 1
Consider a Ramsey-Cass-Koopmans economy where for simplicity we assume g = 0 and A = 1. The
representative households solve the following utility maximization problem:
Z ∞
c1−σ − 1
max U = e−(ρ−n)t t dt
0 1−σ
subject to ȧt = (rt − n) at + wt − ct + vt

where v is the lump-sum transfer from the government to households.

The representative firm solves the following profit maximization problem:

max Πt = (1 − τ y ) Yt − (rt + δ) Kt − wt Lt
subject to Yt = Ktα L1−α
t

where τ y is the firm revenue tax (equivalent to taxing all households’ income regardless of its source).

(a) Derive the first order conditions of the household.


(b) Recast the problem of the firm in per worker terms. Derive the first order conditions of the firm.
(c) Write down the government budget constraint. Using the assumptions of closed economy and
balanced government budget, find the conditions for general equilibrium in this economy.

(d) Find the steady state level of capital per worker k ∗ and consumption per worker c∗ in this economy.
Discuss how they depend on the tax rate τy .

Problem 2
Consider an perfectly competitive economy where individual price taking firms face the following pro-
duction function:
α 1−α
Yit = At Kit Lit
Assume that publicly available technology depends on the average level of capital per worker k:
P η
Kit
At = P i
= ktη
i Lit

where η represents a learning-by-doing externality.

The aggregate final goods production is a sum of individual firms’ outputs:


X
Yt = Yit
i

Consumers solve the following utility maximization problem:


Z ∞
c1−σ − 1
max U = e−(ρ−n)t t dt
0 1−σ
subject to ȧt = (rt − n) at + wt − ct

(a) Find the first order conditions characterizing the optimal choice of the consumer.
(b) Find the first order conditions characterizing the optimal behavior of the firm assuming that there
is a constant rate of capital depreciation δ.

1
(c) Describe the general equilibrium in this economy using (a) and (b).
(d) Draw a phase diagram in the (k, c) space; will the long run equilibrium in this economy be stable
if α + η < 1? What about if α + η = 1?

(e) Assuming that the initial level of capital in this economy is below its steady-state value describe the
behavior of k, c, y and the growth rate of per capita income over time in the two above mentioned
cases.

Problem 3
Suppose the economy’s production function depends positively (p0 (·) > 0) on the ratio of government
expenditures to GDP, denoted with ω ≡ G/Y :

Yt = AKt · p (ω)

Assume no population growth for simplicity. Then the problem of the households can be stated using
aggregate variables:
Z ∞
C 1−σ − 1
max U = e−ρt t dt
0 1−σ
subject to K̇t = rKt − Ct

Assume that there is a firm revenue tax τ y and the representative firm solves the following profit maxi-
mization problem:

max Πt = (1 − τ y ) Yt − (r + δ) Kt
subject to Yt = AKt · p (ω)

(a) Find the first order conditions characterizing the optimal choice of the consumer.
(b) Find the first order conditions characterizing the optimal behavior of the firm.

(c) Describe the general equilibrium in this economy using (a) and (b).
(d) Solve the social planner’s problem using the following resource constraint:

K̇t = AKt · p (Gt /Yt ) − δKt − Ct − Gt → K̇t = (1 − ω) AKt · p (ω) − δKt − Ct

Note that ω can be chosen by the social planner.


(e) Under which conditions there is equivalence between the decentralized equilibrium from (c) and
the social planner’s equilibrium from (d)?

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