Consider a household with the following utility function representing their preferencesover consumption:U = u(Ct) + Bu(C++1)with=-u(C) = exp(-aC), BE (0,1), a > 0where C and C++1 represent consumption in the current and future periods, respectively.The household faces a two-period decision problem. They receive endowments of Y, andYt+1 in the current and future periods, respectively. The real interest rate is denoted byrt.Notice: The utility function u(C) takes on negative values for all positive consumptionlevels. However, in economic models, the absolute value of utility is less important thanhow utility changes with consumption. A higher level of utility represents a morepreferred outcome for the household.Question:Formulate the household's budget constraints for the current and future periods. Com-bine them to derive the household's intertemporal budget constraint.Write down the household's optimization problem (objective function) that they seek tomaximize.Derive the first-order conditions (Euler Equation) that characterize the optimal con-sumption plan. Provide an economic interpretation of these conditions (hint: you needto take logs at some point to make the expressions linear

Utility function : U = u(Ct) + Bu (Ct+1)Where , u(C) = -exp (-aC) In period t -Consumption : Ct…

Consider a household with the following utility function representing their preferences over consumption: U = u(Ct) + Bu(C++1) with u(C) = − exp(−aC), BE (0,1), a > 0 where C+ and C++1 represent consumption in the current and future periods, respectively.

Consider a household with the following utility function representing their preferences over consumption: U = u(Ct) + Bu(C++1) with u(C) = − exp(−aC), BE (0,1), a > 0 where C+ and C++1 represent consumption in the current and future periods, respectively.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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