described by Assume the representative consumer lives in two periods, and his preferences can be U...

 

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described by Assume the representative consumer lives in two periods, and his preferences can be U (c, c') = c¹/2 + B (c)¹/², where c is the current consumption, c'is next period consumption, and ß = 0.95. The consumer receives an income y = 100 in the current period and y' = 110 in the next period. The government wants to spend G = 30 in the current period and G' = 35 in the future period. a) Solve the consumer's problem by finding the optimal allocations c* and c'* as a function of interest rate r. b) Is the economy at equilibrium when the interest rate equals 10%? Explain. c) What are the equilibrium values of c and c'? d) What is the equilibrium interest rate? e) How will the equilibrium interest rate response to an increase in G? described by Assume the representative consumer lives in two periods, and his preferences can be U (c, c') = c¹/2 + B (c)¹/², where c is the current consumption, c'is next period consumption, and ß = 0.95. The consumer receives an income y = 100 in the current period and y' = 110 in the next period. The government wants to spend G = 30 in the current period and G' = 35 in the future period. a) Solve the consumer's problem by finding the optimal allocations c* and c'* as a function of interest rate r. b) Is the economy at equilibrium when the interest rate equals 10%? Explain. c) What are the equilibrium values of c and c'? d) What is the equilibrium interest rate? e) How will the equilibrium interest rate response to an increase in G?

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Answer is MRS 2 1 102111 B 095 Composting MRs with pr... View the full answer