MGEC58H3 Lecture 3: Education and Human Capital

Given the utility function U = ln c + (0.25) ln c'

and the budget constraint

c + c'/(1+r) = y + y'/(1+r)

where y=100 and y'=120 and the interest rate r = 0.05

What is the optimal value of current consumption c*? Show all steps.

Question 5. (15 marks) Consider a function y = f(). What is the definition of the differential of y with respect to r. (b) Let y = 4.0 +2 ln(+e). Find Ay (the actual change in y) and dy (the differential) at r=0 if dr = 0.01.

Suppose the demand for good x is ln Q_x^d = 21 - 0.8 ln P_x - 1.6 ln P_y + 6.2 ln M + 0.4 ln A_x. Then we know good x is:

A. an inferior good

B. An elastic good

C. A Normal Good

D. A Giffen good

Please explain how you determine the answer