3. Analytic Question on Durable Consumption It is known that durable consumption is more sensitive to interest rates and expected income. In this question, ve investigate if this is the case in the context of the model we have been studying. We investigate the following lecision: 1 U (c1, c2) = max {c1,c2} 2 /C1 + o+ ubject to the following budget constraints: The time 1 budget constraint: a = Y1 - C nd the time 2 budget constraint: C2 = Y2 + (1 +r) a. The novelty is that ro is now a variable to represents past purchases of goods 1. You can think of this as a car. n turn, we have that a1 = c1 so a1 is consumption derived utility in period 2 derived from past purchases. For this juestion assume that B (1+r) = 1. Answer the following questions. а. Substitute out a from both budget constraints, the one at time 1 and time 2, to write a single
3. Analytic Question on Durable Consumption It is known that durable consumption is more sensitive to interest rates and expected income. In this question, ve investigate if this is the case in the context of the model we have been studying. We investigate the following lecision: 1 U (c1, c2) = max {c1,c2} 2 /C1 + o+ ubject to the following budget constraints: The time 1 budget constraint: a = Y1 - C nd the time 2 budget constraint: C2 = Y2 + (1 +r) a. The novelty is that ro is now a variable to represents past purchases of goods 1. You can think of this as a car. n turn, we have that a1 = c1 so a1 is consumption derived utility in period 2 derived from past purchases. For this juestion assume that B (1+r) = 1. Answer the following questions. а. Substitute out a from both budget constraints, the one at time 1 and time 2, to write a single
Chapter3: Preferences And Utility
Section: Chapter Questions
Problem 3.13P
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