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ISHISE, Hirokazu
Student ID:
max
t u(ct , lt )
(1)
t=0
(2)
(3)
(4)
max t
t = yt rt kt wt lt
(5)
(6)
yt = at kt lt1
(7)
(8)
Question 1 (2 points)
Derive the optimization conditions of the household problem by (1) setting-up a Lagrangian,
(2) deriving the first order conditions and the transversality condition.
Set-up a Lagrangian,
L=
(9)
t=0
(10)
(11)
(12)
(13)
Summer 2014
Mini Quiz 1
ISHISE, Hirokazu
Question 2 (2 points)
Write down the labor supply condition and the Euler equation. (You do not need to show
derivations. Just write them down).
1 + c ult
,
1 l uct
uct = (rt+1 + 1 ) uct+1 .
wt =
(14)
(15)
Question 3 (2 points)
Define a competitive equilibrium.
Definition:
A competitive equilibrium of this economy is the quantities
{ct , lt , xt , yt , t , kt+1 }
t=0 and the prices {rt , wt }t=0 for given exogenous values {at , gt }t=0 ,
{c , l }, and k0 such that
(1): the HH maximizes the life-time utility subject to constraints, taking the price as
given,
(2): the firm maximizes the profits taking the prices as given,
(3): markets clear.
Question 4 (1 point)
Suppose that
u(ct , lt ) = ln ct + (1 ) ln(1 lt ),
at = a
.
(16)
(17)
(18)
1
1 + .
(19)
Summer 2014
Mini Quiz 1
ISHISE, Hirokazu
Question 5 (3 points)
Discuss the eects of changes in parameters on the steady state value of r:
on r
on r
c on r
State increasing or decreasing, and give intuitions.
Summer 2014