Merge the two budget constraints into a single lifetime budget constraint by eliminating savings from the system of two constraints.

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
icon
Related questions
Question

Merge the two budget constraints into a single lifetime budget constraint by eliminating savings from the system of two constraints.

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
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
total expenditures on purchasing bonds is qs1. Let c1 denote the amount of consumption
in period 1 chosen by the individual. In the second period of life, consumption in the
amount c2 is financed out of the returns from savings and period 2 income, Y2.
The problem of the individual is to maximize lifetime utility while respecting the
budget constraints of periods 1 and 2 by choice of (c1, C2, s1). Formally, the individual
solves the problem
= (slope of the utility function becomes vertical as consumption
max {u(c) + 8и(с2)}
C1,C2,81
subject to the first period budget constraint,
qs1+ C1 = y1
along with the second period budget constraint,
C2 = Y2 + S1.
Transcribed Image Text: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 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 total expenditures on purchasing bonds is qs1. Let c1 denote the amount of consumption in period 1 chosen by the individual. In the second period of life, consumption in the amount c2 is financed out of the returns from savings and period 2 income, Y2. The problem of the individual is to maximize lifetime utility while respecting the budget constraints of periods 1 and 2 by choice of (c1, C2, s1). Formally, the individual solves the problem = (slope of the utility function becomes vertical as consumption max {u(c) + 8и(с2)} C1,C2,81 subject to the first period budget constraint, qs1+ C1 = y1 along with the second period budget constraint, C2 = Y2 + S1.
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 2 steps

Blurred answer
Knowledge Booster
Budget Constraint
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:
9780190931919
Author:
NEWNAN
Publisher:
Oxford University Press
Principles of Economics (12th Edition)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education