Tutorial 8
ECON2102 - Macroeconomics II
Two-period model
Consider an economy in which a representative agent lives for two periods (year 0 and year 1). The representative agent derives utility from consumption and discounts the future at rate β. The agent lifetime utility is given by:
U = u(c0) + βu(c1)
The agent receives an initial endowment at time zero (a0 ) and works in periods zero and one. His/her labour income is y0 and y1 respectively.
a) Write down the maximization problem in detail.
b) Write down the Lagrangian that represents the maximization problem.
c) Derive the optimal conditions (first-order conditions) and the Euler Equation.
d) Interpret the Euler Equation
e) Under what conditions consumption is constant or increases/decreases over time?
f) Solve for consumption as a function of the primitives of the model. (use ln utility function)