ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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7. Consider the model where an individual has wealth k which they can either save or
consume. If they save it, they receive a fixed and exogenous return r. The
instantaneous utility function is given by:
u(c, k) = c + a(k)
where c is consumption, k is wealth, and a(k) is a function that defines the utility
that an individual gets from holding wealth.
The growth in wealth is given as the returns on wealth rk, plus income from
working z(t), minus consumption c(t).
a. Write out the differential equation for wealth.
b. For an infinite time model, set up the optimal control problem with discounting
at a rate 8.
c. Write the current-valued Hamiltonian of this problem.
d. Derive the steady-state level of consumption.
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Transcribed Image Text:7. Consider the model where an individual has wealth k which they can either save or consume. If they save it, they receive a fixed and exogenous return r. The instantaneous utility function is given by: u(c, k) = c + a(k) where c is consumption, k is wealth, and a(k) is a function that defines the utility that an individual gets from holding wealth. The growth in wealth is given as the returns on wealth rk, plus income from working z(t), minus consumption c(t). a. Write out the differential equation for wealth. b. For an infinite time model, set up the optimal control problem with discounting at a rate 8. c. Write the current-valued Hamiltonian of this problem. d. Derive the steady-state level of consumption.
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