Consider a representative individual who lives for TWO periods. The individual is endowed with one unit...
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Consider a representative individual who lives for TWO periods. The individual is endowed with one unit of labour in each period of his/her life. The individual consumes in both periods and his/her instantaneous utility function is given by: ut In {c (14)-} where 0 < a < 1, u = utility at time t, c = consumption at time t, l = labour supply at time t. Denote the wage rate in periods 1 and 2 by w and w, respectively. Also, define r to be the interest rate. (a) Set up a constrained maximization problem for the individual. [10 marks] (1-1) (b) Solve the constrained maximization problem in part (a). Does the ratio (1-1) depend on w, W and r? If yes, then explain how. [20 marks] (c) Suppose a positive technology shock happens in period 1 and the same shock prevails for TWO periods. How will the ratio (1-1) in part (b) change? Explain. [10 (1-1) marks] (d) Explain how would the individuals substitute their labour between the periods? How will it affect the total output in the economy? [10 marks] Consider a representative individual who lives for TWO periods. The individual is endowed with one unit of labour in each period of his/her life. The individual consumes in both periods and his/her instantaneous utility function is given by: ut In {c (14)-} where 0 < a < 1, u = utility at time t, c = consumption at time t, l = labour supply at time t. Denote the wage rate in periods 1 and 2 by w and w, respectively. Also, define r to be the interest rate. (a) Set up a constrained maximization problem for the individual. [10 marks] (1-1) (b) Solve the constrained maximization problem in part (a). Does the ratio (1-1) depend on w, W and r? If yes, then explain how. [20 marks] (c) Suppose a positive technology shock happens in period 1 and the same shock prevails for TWO periods. How will the ratio (1-1) in part (b) change? Explain. [10 (1-1) marks] (d) Explain how would the individuals substitute their labour between the periods? How will it affect the total output in the economy? [10 marks]
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Related Book For
Multinational Business Finance
ISBN: 978-0132743464
13th edition
Authors: David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett
Posted Date:
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