Suppose in a 2-period model that the consumer has a wage income when young of w1=10...

Suppose in a 2-period model that the consumer has a wage income when young of w₁=10 and when old w₂=10. The consumer has a Cobb-Douglas utility function as U(c₁,c₂)=c₁^αc₂^1-α. The asset carried from young to the old is a₂ and the interest rate is r.

(1) Calculate (c₁, c₂, a₂) (10 points)

When α=0.1, r=0
When α=0.9, r=0

(2) How would you interpret the result in (1)? What is the intuition behind the different results given different parameter values? (5 points)

(3) Calculate (c₁, c₂, a₂) (10 points)

When α=0.5, r=0
When α=0.5, r=1

(4) How would you interpret the result in (3)? What is the intuition behind the different results given different parameter values? (5 points)

Expert Solution

Rahul Sunny answered 2 years ago

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