Consider the two-period household-maximization model discussed in class. The model is modified in order to look at applications including credit constraints, interest-rate markups, and taxation. A representative household lives for two periods and maximizes utility of consumption in period 1 and in period 2. The utility is represented by log(c) where c denotes consumption. Assuming no discounting between period 1 and period 2. The maximization problem for the representative household can be written as below (see image): Question: Show consumption c1 and c2 (you can use algebraic or graphical methods). In the answer, you should discuss whether a1 ≥ 0 or a1 < 0 and provide an economic interpretation. What determine(s) the sign of a1 and why
Consider the two-period household-maximization model discussed in class. The model is modified in order to look at applications including credit constraints, interest-rate markups, and
Question: Show consumption c1 and c2 (you can use algebraic or graphical methods). In the
answer, you should discuss whether a1 ≥ 0 or a1 < 0 and provide an economic interpretation.
What determine(s) the sign of a1 and why?
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