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2012 June Problem

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Rajendra Patidar
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28 views5 pages

2012 June Problem

macro

Uploaded by

Rajendra Patidar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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2012 Macro Qualifier (June) Instructions: There are two parts. They are equally weighted. Follow the in- structions given for each part. You have 4 hours. Part 1 1. Consider the following growth model where the planner chooses sequences of consump- tion in order to max > Bt log(ce), = Ste Cet hess S Ae(he)®,t 2 0, ky > 0. Suppose that the sequence {Ay;t > 0} follows a periodic pattern, that is, Ar = 1 for $=0,2,4,... and Ay =A > 1 for t= 1,3,5,... (2) Set up the Bellman functional equations associated with odd period and even period. (b) Solve for the policy functions applicable to odd periods and policy functions =p- plicable to even periods. (Conjecture that the value function takes the form of a, + be log(k) in even periods and a, +0, log(k) in odd periods, where ae, be, do, bo are parameters) (c) Show that the “steady state” of this dynamic model contains a two-period cycle. 2, Consider an economy with a continuum of identical consumers. The utility of a repre- sentative consumer is a E [= oe , = where f € (0,1), ¢ is consumption and E is the expectation operator. Bach consumer owns 2 trees, indexed by g and b. The fruit of tree i € {9,0}, yi, evolves as where 6; is an aggregate shock whose value is either MT or L. 0 0. C is a consumption index given by “(fowl with C (j) representing the quantity of good i consumed by the household, I assume the existence of a continuum of goods represented by [0, N] interval. ¢ is greater than 1. H hours of time are inelastically supplied for work (in ather words, H is fixed, not a choice variable). ‘The budget constraint is nN [ PC) di =WH+T 5 where W is the nominal wage and T is a lump-sum component of income, or more specifically, T is the dividend income (the houschold is the owner of the firms). Since the right-hand side of the budget constraint is exogenous to the household, the remain- ing problem is finding the optimal allocation of consumption expenditure, which we will solve below. (a) The problem of maximizing C given : i P()CWdi=WH+T (a Is can be expressed by moans of the Lagrangean N ae rd N L= [[ cw? a] fy [f POCwa-wa-T| bo : Derive the associated first-order conditions Pa) _ ( 218) PG) \C(). for any i,j € (0, N). (b) The first order condition can be written as ew= ow (FO) ® Show that substituting (2) into (1) obtains aoe for tea Pa cy) (si) [ Pdi WHT @) 3 (c) Define P = [ Je Pw" ai] F= Show that (3) can be written os avn fr “WH+T ow= (FE) C) (d) By substituting (4) into the definition of C, show that N [ P()C@di= PC lb and therefore the total expenditure is the product of price index times the quantity index. (©) (4) is the downward sloping demand curve. Draw two demand curves with different values of ¢ in a diagram with P (7) plotted on the vertical axis and C'(j) plotted on the horizontal axis. Clearly indicate which curve corresponds to a high € and which curve corresponds to @ low e. 2. (firm’s problem): Bach firm produces a differentiated good with technology Y@=H@) H (3) is firm ?’s labor input. There is no price stickiness. Each firm chooses P (i) to maximize profits defined as PY @-WH() subject to the demand constraint Y@= 8)"e Individual firms take aggregate price level P and aggregate consumption index C as given. (a) Show that the optimal price is Pi=- (HINT: profits can be written as (P (i) — W)Y (i) = (P (i) - W) (Bye) (b) Let (i) denote the maximized profits. What is the ratio of profits to costs, i.e., (i) / (WH (i)), for the firm which is optimally choosing P (i)? How does it depend on the parameter «? Why does it so? 3. (equilibrium): Goods market clearing condition and labor market clearing condition require CO) =Y (i) for any 1 € [0,N] N a-[ H(i ai Because of the symmetry between firms, we can easily find H (i) = H/N in equilibrium. 4 (a) Find the equilibrium aggregate consumption index C. (b) Find the equilibrium relative price P (i) /P for any i € [0, N] (©) Find the equilibrium real wage W/P. (@) Find the labor share WH/PC and the profits share x (i) N/PC in equilibrium. (@) Is the equilibrium allocation efficient? Answer yes or no, and explain why. (f) Let’s do a simple comparative staties with respect to V. How do C, P (i) /P, and W/P change when N gets larger? Give intuition for each of those.

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