5 Optimization with infinite horizon Problem 5.1. Consider a consumer who lives forever. She starts out with zero wealth ao = 0, receives an income stream yt and chooses a level of consumption ct and savings at+1 every period. Her maximization problem is given by: ∞ U = Σβtu(c) • t=0
Q: 8. Drawinga yield curve Given the indicated maturities listed in the following table, assume the…
A: You can use a yield curve as a tool to better understand bond markets, interest rates, and the state…
Q: What is the principal amount if the amount of interest at the end of 2 ½ years is Php4 50 for simple…
A: A sort of interest known as simple interest is computed just using the principle borrowed or…
Q: ubax, a U.S. manufacturer of athletic shoes, estimates the following linear trend model for shoe…
A:
Q: The Consumer Price index in 2015 was 115 and increase to 125 in 2016, Calculate rate of inflation in…
A: Given information: The consumer price index in 2015 was 115 i.e., CPI in 2015 = 115 ------------ The…
Q: Problem 4 Suppose that the production function is Cobb- Douglas, Yt (Kt)a (Lt)1-a = where Kis…
A: Production Function: Production function represents a relationship between the input and output. It…
Q: Using examples to differentiate between positive consumption externalities and negative production…
A: Introduction Externality occur is an economy when the production and consumption of a specific good…
Q: 1. Opportunity cost
A: It is the value of the best alternative that must be given up in order to pursue a certain action.…
Q: The population of Eturia is shown in the table below. Population (millions) a. Population growth…
A: Year Population 2018 16 2019 16.56 2020 17.14 1. What is population growth between…
Q: If consumption in the United States is $10 trillion, investment $5 trillion, government purchases $4…
A: "GDP is also known as Gross Domestic Product. Gross domestic product measures the value of all the…
Q: 1. Draw a production possibility frontier (make the scale on both axis the same). The economy is…
A: “Since you have posted multiple questions with multiple sub parts, we will provide the solution only…
Q: Question 11 Assume a country produces output according to a production function: Y = the growth rate…
A: Here the growth rate of A is represented by the formula:- (1/A) x ( dA/dT) Now for the growth rate…
Q: Diego and Kris are roommates. They spend most of their time studying, but they leave some time for…
A: Trade refers to the situation that includes the movement of goods and services. The trade aspects…
Q: Suppose we have the following consumer price index (CPI) data for a nation: Year CPI 2016 222.77…
A: The inflation rate implies the rate at which inflation is rising over a specific period. This rate…
Q: You work for the Committee for Economic Evaluation in the small nation of Kinsdale. Your current job…
A: GDP can be defined as a total money value of final items and services produced within the domestic…
Q: Why aren't more resources dedicated to ensuring adequate prudential oversight of the financial…
A: Introduction In order to ensure the stability of the banking sector and, consequently, the economy…
Q: And now for some Shakespeare (who says economists aren’t cultured!). In Shakespeare’s play Hamlet,…
A: Given information As per Ophelia, there are 2-period consumption models, where one can borrow money…
Q: If the Demand for a good in linear in its price, then ... the elasticity of Demand is larger (in…
A: When a demand curve is linear, it implies that demand curve is a straight downward sloping line with…
Q: Millennium Freight is evaluating the possibility of adding a new shipping route, which would require…
A: The time value of money refers to the concept that a sum of money is worth is greater now than the…
Q: 1. Suppose that on January 1, 2021, you purchased a coupon bond with the following characteristics:…
A: The total financial return from income and asset appreciation over the course of a holding period is…
Q: How will the equilibrium price (P") and equilibrium quantity (Q") of big-screen TVs be affected due…
A: Introduction An equilibrium price is a balance of demand and supply factors. Equilibrium quantity…
Q: would this be considered deflation?
A: Inflation is the rate of rise in costs over a given period. Inflation is typically a wide measure,…
Q: Suppose you are a senator writing a bill to index Social Security and federal pensions: i.e., your…
A: The GDP deflator is a measure of the overall level of prices in the economy. It is calculated by…
Q: The information in the table below is for the economy of Mensk. Round your responses below to one…
A: Given information: Working-age population = 25 Number of people in full-time employment = 12 Number…
Q: Explain what is meant by the gender pay gap, and what horizontal and vertical segregation are.…
A: Introduction The disparity between the typical salaries earned by men and women in the workforce is…
Q: Romer’s (1986, 1990) approach to endogenous growth laid out a model which appeared to show that…
A: Romer's endogenous growth model posits that technological progress and knowledge accumulation leads…
Q: Suppose that the preferences of a consumer regarding the consumption of goods q₁ and q2 are…
A:
Q: 3.17. Consider the social choice function that selects as a winner the candidate (or candidates)…
A: In economics, voting refers to a decision-making process used in democratic societies to reach a…
Q: Consider the table below showing the costs for a firm. Quantity Fixed Cost Variable Cost Total Cost…
A: Total cost is the sum of fixed and variable cost. Fixed cost remains same at all level of output.…
Q: In the Solow model, ________ is assumed to be constant. capital accumulation…
A: Solow growth model refers to an economic model that helps to determine country's economic growth…
Q: Month CPI January 281.93 February 284.18 March 287.71 April 288.66 The minimum wage was $1.60 in…
A: The Consumer Price Index (CPI) is a measure of the average change in prices over time for a basket…
Q: Which of the following is an example of investment? OA. Continental buying Airbus planes OB. Mike…
A: In economics, investment refers to the purchase of goods that are not consumed today but are used in…
Q: xplain the role of expectations in a dynamic aggregate demand - dynamic aggregate supply (DAD-DAS)…
A: In a dynamic aggregate demand-dynamic aggregate supply (DAD-DAS) model, expectations play an…
Q: Which of the following would cause the aggregate supply curve to decrease? better equipment and…
A: Aggregate supply is defined as the quantity of goods produced and offered for sale by the producers…
Q: How much monthly deposit must be made for 7 years and 2 months in order to accumulate P 250,000 at…
A: Present value is the value of investment in today's dollar. Future value is the value of investment…
Q: Hacmillan Learning Christine and Paul are deciding how to split their time between writing music and…
A: A comparative advantage is the capacity to produce goods and services at a lower cost, without…
Q: 1) Draw a typical demand curve or schedule for Baseball and then show your answers the following: a)…
A: The willingness to buy a good backed by the purchasing power is known as the demand. The law of…
Q: Suppose the long-run production function for a competitive firm is f(L,K)= L 1/3 K 1/4 , where L is…
A: Disclaimer: - Since You asked multipart question, we are solving only 3 subparts as per guidelines.…
Q: Consumption of certain public goods by individuals or firms reduce the quality of services…
A: Public goods are non-excludable and non-rival in nature. Non-rival goods are such that goods for…
Q: 7. Suppose the only game in town involves flipping a fair coin (so Heads and Tails are equally…
A: The likelihood of winning at least $5000 by making a single bet of $10000 on a fair coin flip is 0.5…
Q: The short-run total cost function of repairing s cars is TC(y)=2y2+10. Find the following: (a.…
A: Fixed costs are costs that do not vary with the level of production or output. They are expenses…
Q: 1. The three major actors in terms of economic activity are A. governments, businesses, and…
A: Since you have asked multiple question, we will solve the first question for you. If you want any…
Q: Assume that an economy is initially operating at the natural rate of output (full employment…
A: Aggregate demand refers to the demand for all finished goods and services at various price levels in…
Q: explain the two types of risks, and explain the two types of diversification of idiosyncratic tisks
A: The uncertainty of possible outcomes from the production is said to be a risk. Economic risk is the…
Q: Thomas Robert Malthus is an important figure in classical economic thought, but his ideas were…
A: Thomas Malthus was an 18th-century economist and demographer who is best known for his theory of…
Q: The manager of the aerospace division of General Aeronautics has estimated the price it can charge…
A: In probability theory, the expected value is calculated as the sum of the products of each possible…
Q: 1. What is entrepreneurship. Cite a situational example to justify your answer. 2. Debunk 3 myths…
A: 1) A person who decides to launch a new business, accepts any risks, and enjoys the benefits is an…
Q: Let the quantity demanded be given by the function function D(P) where pis price. Assuming it is…
A: Law of Demand: keeping other things equal if the price of a product increases, then the quantity…
Q: Answer the following questions from the given Table below which contains data for Saudi Arabia for…
A: Under the expenditure approach, the sum of amount spent by the household sector, business sector,…
Q: A war would have the following effect on capital in an economy: Increase the real rental…
A: An increase in the capital stock causes a fall in marginal product of capital and vice-a-versa due…
Q: A remotely located air sampling station can be powered by solar cells or by running an electric line…
A: Future-Worth Analysis will evaluate the alternatives based on some future point in time. The…
Complete utility maxamization problem using lagrangian method, ignore other question parts.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
- A consumer whowill consume c1 in period 1 and c2 in period 2 exhibits pure time discounting if they evaluate their consumption using the utility functionU(c1; c2) = u(c1) + βu(c2)where 0 < β < 1, and β < 1 captures the idea that consumption inthe future is not worth as much as current consumption. Note thatU(·; ·) depends on two arguments, while u(·) depends on only oneargument. We assume that u0(·) > 0, u00(·) < 0, and suppose thatthe consumer can split their current wealth, W, between the twoperiods as they please. In this problem, you are supposed to findproperties of the the optimal savings, s, as the solution tomax0≤s≤W U(W - s; s) = u(W - s) + βu(s):1. Using the FOCs, show that W - s∗ is larger than s∗ for anyβ < 1.2. Show that s∗ is a weakly increasing function of W (this can bedone without FOCs).3. Show that s∗ is a weakly increasing function of β (this too canbe done without FOCs).4. If u(x) = log(x), give the optimal savings as a function of β andW.When analyzing how borrowing and lending affect the consumer's budget constraint, we measure spending in the current time period on the horizontal axis and spending in the future time period on the vertical axis. Assume that the interest rate at which the consumer can lend and borrow is 10%, income in period 1 is $1000 and income in period 2 is $1200. The point of maximum current consumption can be expressed as 1000+ 1200/1.1. 1000(1.1) + 1200. 1000+ 1200 + .1 1000/1.1 + 1200/1.1 + 1.A consumer's consumption-utility function for a two period horizon is 0.5 U(Cg,G) =C,G" he consumer's earned income stream is given by mo, m1 and the market rate of interest is r. a) Write the intertemporal budget constraint in present value terms. If the consumer does not consume anything in peripd 0, what is the most she can consume in period 1? b) Draw a graph that shows optimal consumption in each period co* and c1*. What is the slope of her budget line? c) Solve the problem for optimal consumption in each period co* and c;*. d) Suppose mọ is S50 and mị is S110 and r = 0.1. Is the consumer a borrower or a lender? Show this outcome by drawing co*. C1*, mo, mį, and bond-holdings on your graph.
- Suppose a person lives for 4 periods. His salary during each period of his life is $30, $60, $90 and $0. He was born without any financial wealth. 1. If the interest rate is 8% per period, what is the present value of the income of this agent? 2. If the individual wishes to have a constant consumption during his life, what will it be? Deduct his level of savings during each of the 4 periods of his life. 3. Suppose our individual cannot borrow (but can save). Determine the consumption and savings profile of the individual. 4. Suppose our individual receives an inheritance at birth of $10. How your answer in c) be affected?(1) Do you think you currently have the disciplineneeded to control your spending in order to free upcash for regular investing? If not, what changes couldyou make? (2) If someone gave you a “hot tip” on astock, how would you go about researching theopportunity before making an investment decision?Consider the two period consumption savings problem faced by an individual whose utility is defined on period consumption. This utility function u(c) has the properties that it is strictly increasing and concave, u'(c) > 0, u"(c) < 0 (where u'(c) denotes the first derivative while u"(c) represents the second derivative) and satisfies the Inada condition lim.-→0 u'(c) approaches zero). The individual's lifetime utility is give by u(cı) + Bu(c2). In the first period of life, the individual has y1 units of income that can be either consumed or saved. In order to save, the individual must purchase bonds at a price of q units of the consumption good per bond. Each of these bonds returns a single unit of the consumption good in period 2. Total savings through bond purchases is s1 so that total expenditures on purchasing bonds is qs1. Let c1 denote the amount of consumption in period 1 chosen by the individual. In the second period of life, consumption in the amount c2 is financed out of the…
- 2. Mr. A has the following utility function and budget constraints: Max 0.1Ln(C1) + 0.7Ln(C2) Subject to S1 + C1 = 100 C2 + S2 = (1 + r)S1 where C1 and C2 are consumption level at young and that at old respectively. Likewise, S1 and S2 are saving at young and saving at old respectively. a) Find out Mr. A’s optimal consumption levels (i.e. C1*, C2*) and optimal savings (i.e. S1*, S2*) in terms of interest rate r. b) Show clearly the results in part a) in a suitable diagram (with C1 as x-axis and C2 as y-axis). c) Is Mr. A a saver ? or a borrower ? d) If r is equal to 0 (i.e. saving gives no returns), will Mr. A still choose to save when he is young (i.e. is S1 still bigger than 0) ? Why ? e) Suppose that Mr. A is not allowed to save (i.e. S1 = 0). What are his optimal consumption levels ? Show his optimal consumption levels in the same diagram you prepare for part a) (with a suitable indifference curve). f) If r increases,…Analysing Utility Function and Household Optimization Consider a household with the following utility function representing their preferences over consumption: with U = u(C) + Bu(C++1) u(C) = exp(-aC), BE (0,1), a>0 where Ct and Ct+1 represent consumption in the current and future periods, respectively. The household faces a two-period decision problem. They receive endowments of Yt and Yt+1 in the current and future periods, respectively. The real interest rate is denoted by rt. Notice: The utility function u(C) takes on negative values for all positive consumption levels. However, in economic models, the absolute value of utility is less important than how utility changes with consumption. A higher level of utility represents a more preferred outcome for the household. Solving for Current Consumption Demand Function Solve for the household's demand function for current consumption (Ct). Express Ct as a function of Yt, Yt+1, rt, and the parameters ẞ and a. Discuss what happens to Ct…Malaysians are at their worst financial position in 2022 compared with the last five years, and thelooming recession may push them to the brink with dwindling savings coupled with theaftermath of the Covid-19 pandemic. A recent survey by Malaysian financial services websiteRinggitPlus revealed that 70 per cent of Malaysians saved less than RM500 per month (S$153)in 2022 or did not save at all. “This is compared with 52 per cent of Malaysians saving less thanRM500 monthly in 2021, the largest year-on-year increase since 2018,” the RinggitPlusMalaysian Financial Literacy Survey 2022 showed....Mr Patrick Tay, deals partner, economicsand policy at Malaysia PwC, is not surprised by the decline in savings in 2022. “One reason forthe depleted savings is low wages and higher inflation. But another key reason is that Malaysiansare spending more post-pandemic on holidays or other leisure expenses because some may feelthat they saved during the pandemic, and it is fine to now spend this year…
- Patience has a utility function 1/2 1/2 U(cl, c2) = c? + 0.80c/? where c is her consumption in period 1 and c is her consumption in period 2. Her income in period 1 is 3 times as large as her income in period 2. At what interest rate will she choose to consume the same amount in period 1 as in period 2? a. 2 b. 0.13 c. 0.25 d. 0 е. О.38 20% 13% 25% 0%[**] Simon has current wealth of $36, including $20 in cash. With probabil- ity Simon's money will be stolen (contingency 1), leaving him with only $16 to spend on consumption, and with probability his cash will not be stolen (contingency 2) so he can spend the entire $36 on consumption. Simon has utility function u (0₁.0₂) = √6 + 2√ where c is consumption spending in contingency i. Show Transcribed Text 1. What is the expected value of Simons contingent consumption? 2. What is the expected utility of Simons contingent consumption? 3. What is Simons MRS at his current contingent consumption bundle 4. An insurance company offers to fully insure Simon against the risk of theft for a premium (price) of $P. That is, if Simon pays $P to the insurance company, then the insurer will replace Simons $20 in contingency 1. If Simon buys the insurance his contingent consumption bundle is therefore (36 P; 36 P). i. What is Simons MRS at the fully insured contingent consumption bundle? ii. At what…Assume that someone has inherited 2,000 bottles of wine from a rich uncle. He or she intends to drink these bottles over the next 40 years. Suppose that this person’s utility function for wine is given by u(c(t)) = (c(t))0.5, where c(t) is each instant t consumption of bottles. Assume also this person discounts future consumption at the rate δ = 0.05. Hence this person’s goal is to maximize 0ʃ40 e–0.05tu(c(t))dt = 0ʃ40 e–0.05t(c(t))0.5dt. Let x(t) represent the number of bottle of wine remaining at time t, constrained by x(0) = 2,000, x(40) = 0 and dx(t)/dt = – c(t): the stock of remaining bottles at each instant t is decreased by the consumption of bottles at instant t. The current value Hamiltonian expression yields: H = e–0.05t(c(t))0.5 + λ(– c(t)) + x(t)(dλ/dt). This person’s wine consumption decreases at a continuous rate of ??? percent per year. The number of bottles being consumed in the 30th year is approximately ???