The representative agent lives for two periods (1 and 2) and receives exogenous incomes of y...

 

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The representative agent lives for two periods (1 and 2) and receives exogenous incomes of y and y, respectively. The lifetime utility function is given by: 1-o C V(c, c) = +. 1-o clo 1-o with 3( <1) being the discount factor. The agent is allowed to save or borrow at the real interest rate r, but she cannot die with debt or wealth. Assume also that the initial wealth is zero. a. Solve the optimization problem of the agent using the period by period budget constraints. In particular, show the Euler equation. C. b. Find the optimal value of c as a function of the parameters and the exogenous variables of the problem. Find the timal value ofc, as a function of the parameters and the exogenous variables of the problem. d. What is the intertemporal elasticity of substitution (IES)? The representative agent lives for two periods (1 and 2) and receives exogenous incomes of y and y, respectively. The lifetime utility function is given by: 1-o C V(c, c) = +. 1-o clo 1-o with 3( <1) being the discount factor. The agent is allowed to save or borrow at the real interest rate r, but she cannot die with debt or wealth. Assume also that the initial wealth is zero. a. Solve the optimization problem of the agent using the period by period budget constraints. In particular, show the Euler equation. C. b. Find the optimal value of c as a function of the parameters and the exogenous variables of the problem. Find the timal value ofc, as a function of the parameters and the exogenous variables of the problem. d. What is the intertemporal elasticity of substitution (IES)?

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The optimization problem of the agent is to maximize lifetime utility while adhering to budgetary limitations on a period by period basis The first pe... View the full answer