This problem asks you to use your analysis in Problem 8.16 to see how a onetime income shock affects the path of consumption starting from different situations. Specifically, under the same assumptions about the household’s preferences and the distribution of Y as in Problem 8.16, plot, as a function of time, the difference between the paths of C for a household with a realized path of income of {10, 100, 100, 100, ...} and a household with a realized path of income of {100, 100, 100, 100, ...}:

(a) In the case where both households enter the initial period with A = 10. (Recall that At is the household’s wealth at the start of period t that is, before Yt is realized and Ct is chosen.)

(b) In the case where both households enter the initial period with A = 200.

(c) Discuss your results. Are there any noteworthy similarities between the results in parts

(a) and (b)? Any noteworthy differences?