Consider the two period consumption savings problem faced by an individual whose utility is defined on period consumption. This utility function u(c) has the properties that it is strictly increasing and concave, u'(c) > 0, u"(c) < 0 (where u'(c) denotes the first derivative while u"(c) represents the second derivative) and satisfies the Inada condition lim→0 u'(c) approaches zero). The individual's lifetime utility is give by u(ci) + Bu(c2). In the first period of life, the individual has yı units of income that can be either consumed or saved. In order to save, the individual must purchase bonds at a price of = 0 (slope of the utility function becomes vertical as consumption TOod nor hond Foch of thogo bonds roturng o ginglo unit of
Consider the two period consumption savings problem faced by an individual whose utility is defined on period consumption. This utility function u(c) has the properties that it is strictly increasing and concave, u'(c) > 0, u"(c) < 0 (where u'(c) denotes the first derivative while u"(c) represents the second derivative) and satisfies the Inada condition lim→0 u'(c) approaches zero). The individual's lifetime utility is give by u(ci) + Bu(c2). In the first period of life, the individual has yı units of income that can be either consumed or saved. In order to save, the individual must purchase bonds at a price of = 0 (slope of the utility function becomes vertical as consumption TOod nor hond Foch of thogo bonds roturng o ginglo unit of
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Now assume that the utility function takes the function form u(c) = ln(c). Note that the derivative of the natural logarthm is u'(c) = 1/c .
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