Consider a two-period, small, open, endowment economy without
investment and government expenditures, but with durable
consumption goods. Purchases of durable consumption goods in period
1, denoted C1, continue to provide utility in period 2. The utility
of households in period 2 depends on purchases of durable
consumption goods in period 2 , denoted C2, and on the
un-depreciated stock of durables purchased in period 1. Durable
consumption goods are assumed to depreciate at the rate δ ∈ [0, 1].
Household...