Answered: consumption

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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A worker receives, when unemployed, an offer to work forever at wage w, where w is drawn from the distribution F(w). Wage offers are identically and independently distributed over time. The worker maximizes

Where c_t is consumption and lt is leisure. Assume R_t is i.i.d. with distribution H(R). The budget constraint is given by

And lt + n_t ≤ 1 if the worker has a job that pays w_t. If the worker is unemployed, the budget constraint is a_t+1 ≤ R_t(a_t + z − c_t) and l_t = 1. Here z is unemployment compensation. It is assumed that u(·) is bounded and that at , the worker’s asset position, cannot be negative. This assumption corresponds to a no-borrowing assumption. Write the Bellman equation for this problem.

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