(a) Suppose that this individual lives for two periods, write down his/her lifetime expected utility function and intertemporal budget constraint. Carefully interpret each of these equations. Explain why the lifetime budget constraint must be satisfied as a strict equality. (b) Prove that Ct+1 = Ct + &t+1 from the permanent income hypothesis (PIH) to show that consumption follows a random walk. Discuss the full implication of this result. (c) How do changes in r affect expected consumption growth? Interpret the effect of r on expected consumption in the light of precautionary saving.

(a) Suppose that this individual lives for two periods, write down his/her lifetime expected utility function and intertemporal budget constraint. Carefully interpret each of these equations. Explain why the lifetime budget constraint must be satisfied as a strict equality. (b) Prove that Ct+1 = Ct + &t+1 from the permanent income hypothesis (PIH) to show that consumption follows a random walk. Discuss the full implication of this result. (c) How do changes in r affect expected consumption growth? Interpret the effect of r on expected consumption in the light of precautionary saving.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Thank you for your solutions of questions 1-3. Please answer questions 4-5.