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 limeou'(c) = ∞ (slope of the utility function becomes vertical as consumption approaches zero). The individual's lifetime utility is give by u(c₁) + Bu(c₂). In the first period of life, the individual has y₁ units of income that can be either consumed or saved. In order to save, the individual must purchase bonds at a price of q units of the consumption good per bond. Each of these bonds returns a single unit of the consumption good in period 2. Total savings through bond purchases is s₁ so that
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 limeou'(c) = ∞ (slope of the utility function becomes vertical as consumption approaches zero). The individual's lifetime utility is give by u(c₁) + Bu(c₂). In the first period of life, the individual has y₁ units of income that can be either consumed or saved. In order to save, the individual must purchase bonds at a price of q units of the consumption good per bond. Each of these bonds returns a single unit of the consumption good in period 2. Total savings through bond purchases is s₁ so that
Chapter3: Preferences And Utility
Section: Chapter Questions
Problem 3.13P
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