ECON6002 Tutorial 10 (Consumption Behaviour)
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ECON6002
Tutorial 10 (Consumption Behaviour)
1. Consider an individual who lives from 1 to T, and whose lifetime utility is given by U = T11(T) u(CT), where u\ (′) > 0, u\\ (′) < 0. The individual’s income is Y芒 + gt for 1 .t .R, and
0 for R < t .T. The retirement age, R, satisfies 1 < R < T . The interest rate is zero, the individual has no initial wealth, and there is no uncertainty.
(a) What is the individual’s lifetime budget constraint?
(b) What is the individual’s utility-maximizing path of consumption, CT?
(c) What is the path of the individual’s wealth as a function of t?
2. In the model of the Random Walk hypothesis, uncertainty about future income does not affect consumption. Does this mean that the uncertainty does not affect expected lifetime utility? (Hint: Compute E1[U])
2023-05-22