2. Let's create a simple, two-period neoclassical model, far simpler than the models of GLS Chapter 12. In this question, in period t you only use labor to make period t output, and then you decide how much of that output to convert into capital that can be used later to help make period t+1 output. That means the "representative agent" has to decide how much of period t output to consume rather than save, but there's no such choice in period t+1. After all, t+1 is the end of time. Output is made in this very simple, constant returns to scale manner, so in each period double the input creates double the output: YN, YzK You get log utility from consumption in the first period, but square root in the second period (I chose that for a reason-notice that log has stronger diminishing marginal utility than square root!). Of course, you don't like work, so extra hours of work hurt your utility: U = ln(Ct) mNt + 2(C++1) 1/2 -

Principles of Economics 2e
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ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
ChapterD: The Expenditure-output Model
Section: Chapter Questions
Problem 25CTQ: Exercise D25 What role does government play in stabilizing the economy and what are the tradeoffs...
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2. Let's create a simple, two-period neoclassical model, far simpler than the models
of GLS Chapter 12. In this question, in period t you only use labor to make period
t output, and then you decide how much of that output to convert into capital that
can be used later to help make period t+1 output. That means the "representative
agent" has to decide how much of period t output to consume rather than save, but
there's no such choice in period t+1. After all, t+1 is the end of time. Output is
made in this very simple, constant returns to scale manner, so in each period double
the input creates double the output:
YN, YzK
You get log utility from consumption in the first period, but square root in the second
period (I chose that for a reason-notice that log has stronger diminishing marginal
utility than square root!). Of course, you don't like work, so extra hours of work
hurt your utility:
U = ln(Ct) mNt + 2(C++1) 1/2
-
Transcribed Image Text:2. Let's create a simple, two-period neoclassical model, far simpler than the models of GLS Chapter 12. In this question, in period t you only use labor to make period t output, and then you decide how much of that output to convert into capital that can be used later to help make period t+1 output. That means the "representative agent" has to decide how much of period t output to consume rather than save, but there's no such choice in period t+1. After all, t+1 is the end of time. Output is made in this very simple, constant returns to scale manner, so in each period double the input creates double the output: YN, YzK You get log utility from consumption in the first period, but square root in the second period (I chose that for a reason-notice that log has stronger diminishing marginal utility than square root!). Of course, you don't like work, so extra hours of work hurt your utility: U = ln(Ct) mNt + 2(C++1) 1/2 -
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