= In the original treatment of the prob- lem of optimal economic growth, Frank Ramsey argued...

    
 
 
 

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= In the original treatment of the prob- lem of optimal economic growth, Frank Ramsey argued on the basis of ethical beliefs that there should be no discounting of future felicity (p 0). Since the welfare in- tegral will then not generally converge, Ramsey suggested a different approach. He assumed that there is a finite upper limit for either the production function or the felicity function, in either case leading to a finite upper limit to utility called bliss, B: (Q13.12) B = max U(c) = U(CB), {c} where CB is the bliss consumption per worker which is assumed to be finite. He then postulated the following (undiscounted) objective function that is to be minimized: R = √ [B-U(c(t))] dt, /0 (Q13.13) where R is a measure of "regret" (i.e. the social cost associated with deviating from the bliss point). Solve the Ramsey problem of minimizing regret subject to the neo- classical growth model. Assume that there is no technological change and that the population is constant. Illustrate your answer with the aid of a diagram and show that the model is saddle-point stable. = In the original treatment of the prob- lem of optimal economic growth, Frank Ramsey argued on the basis of ethical beliefs that there should be no discounting of future felicity (p 0). Since the welfare in- tegral will then not generally converge, Ramsey suggested a different approach. He assumed that there is a finite upper limit for either the production function or the felicity function, in either case leading to a finite upper limit to utility called bliss, B: (Q13.12) B = max U(c) = U(CB), {c} where CB is the bliss consumption per worker which is assumed to be finite. He then postulated the following (undiscounted) objective function that is to be minimized: R = √ [B-U(c(t))] dt, /0 (Q13.13) where R is a measure of "regret" (i.e. the social cost associated with deviating from the bliss point). Solve the Ramsey problem of minimizing regret subject to the neo- classical growth model. Assume that there is no technological change and that the population is constant. Illustrate your answer with the aid of a diagram and show that the model is saddle-point stable.

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Ramsey model of optimal economic growth Here is a detailed analysis of the diagram The xaxis represe... View the full answer