1. Solve for the two-period consumer optimization problem when the utility function is given as U(C,...

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1. Solve for the two-period consumer optimization problem when the utility function is given as U(C₁, C₂) = CºC₂¯ª and the intertemporal budget constraint is given as C₁ + G₂ ≤Y₁ + 1/ 1+r 1+r (a) Express each period consumption as a function of lifetime income (use Lagrangian and solve for first-order conditions). (b) What is the complementary slackness condition? What is its implication on the budget constraint? (c) What happens to each period of consumption when the interest rate rises? Provide economic intuition for the effects. (d) Assume the zero interest rate for simplicity and provide a shortcut to your answer in (a) using the property of utility function. 1. Solve for the two-period consumer optimization problem when the utility function is given as U(C₁, C₂) = CºC₂¯ª and the intertemporal budget constraint is given as C₁ + G₂ ≤Y₁ + 1/ 1+r 1+r (a) Express each period consumption as a function of lifetime income (use Lagrangian and solve for first-order conditions). (b) What is the complementary slackness condition? What is its implication on the budget constraint? (c) What happens to each period of consumption when the interest rate rises? Provide economic intuition for the effects. (d) Assume the zero interest rate for simplicity and provide a shortcut to your answer in (a) using the property of utility function.

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a Express each period consumption as a function of lifetime income use Lagrangian and solve for firstorder conditions We can express each period of consumption as a function of lifetime income by usin... View the full answer