becomes the form Question 4: Risk Aversion and Euler Equation [6 points] a) Please show analytically...

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becomes the form Question 4: Risk Aversion and Euler Equation [6 points] a) Please show analytically that the utility function U(C) = U(C) = In (C) for the case of the degree of relative risk aversion o = 1. [Hint: (1) note that any expression xa (with a being a constant) can be rewritten as eln (xa) = ea.ln (x) and (2) you need to apply the "rule of L'Hospital"] b) Now assume this particular utility function U(C) = ln (C) in an intertemporal setup in which the representative households wants to maximize C1-0-1 1-0 Ut = opi [In(Ct+i)] with the discount factor = and p being the time preference rate; and with respect to the following intertemporal budget constraint: 1 1+p Ptti Ct+i+ Bt+i - = (1 + it1+i) Bt-1+i. How does the resulting Euler equation look like? How does an increase in inflation changes affect the consumption pattern? becomes the form Question 4: Risk Aversion and Euler Equation [6 points] a) Please show analytically that the utility function U(C) = U(C) = In (C) for the case of the degree of relative risk aversion o = 1. [Hint: (1) note that any expression xa (with a being a constant) can be rewritten as eln (xa) = ea.ln (x) and (2) you need to apply the "rule of L'Hospital"] b) Now assume this particular utility function U(C) = ln (C) in an intertemporal setup in which the representative households wants to maximize C1-0-1 1-0 Ut = opi [In(Ct+i)] with the discount factor = and p being the time preference rate; and with respect to the following intertemporal budget constraint: 1 1+p Ptti Ct+i+ Bt+i - = (1 + it1+i) Bt-1+i. How does the resulting Euler equation look like? How does an increase in inflation changes affect the consumption pattern?

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a Utility Function Transformation 1 Base Utility Function UC C1 2 Transformation to lnC for 1 We want to show that UC becomes lnC when 1 a Using logar... View the full answer