Consider the consumption savings problem faced by an individual living in T endowment y = ....

 

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Consider the consumption savings problem faced by an individual living in T endowment y = ÿ. There is a savings/borrowing techology with return (1+rt). s.t. B¹u(ci) q+a+1 ≤ (1+r)a + y Vt at+12-B₁ ao = 0 max {c₁.0++1)==0 100 periods with per period a) Assume CRRA utility. Solve for {c}o as precisely as possible. b) Let r = 7. Plot the time path of optimal consumption and savings/borrowing {et, at+1}. c) Let r = r. How does an increase in r affect the solution consumption path {co? How does this depend on the intertemporal elasticity of substitution? (Be sure to mention the log utility case.) d) Let r₁1 = 27 and r = for all t # 11. How does the solution consumption path compare to the path in part (c)? e) Discuss c vs. d in terms of substitution and income effects. Consider the consumption savings problem faced by an individual living in T endowment y = ÿ. There is a savings/borrowing techology with return (1+rt). s.t. B¹u(ci) q+a+1 ≤ (1+r)a + y Vt at+12-B₁ ao = 0 max {c₁.0++1)==0 100 periods with per period a) Assume CRRA utility. Solve for {c}o as precisely as possible. b) Let r = 7. Plot the time path of optimal consumption and savings/borrowing {et, at+1}. c) Let r = r. How does an increase in r affect the solution consumption path {co? How does this depend on the intertemporal elasticity of substitution? (Be sure to mention the log utility case.) d) Let r₁1 = 27 and r = for all t # 11. How does the solution consumption path compare to the path in part (c)? e) Discuss c vs. d in terms of substitution and income effects.

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a The given problem represents an intertemporal consumptionsavings problem To solve for the optimal ... View the full answer