ECON482 Midterm: ECON 482 UofA E482A209F
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This assignment will be marked out of 280. The maximum number of marks that can be earned on a question is given in brackets next to the question. Your answers should be concise and to the point. Suppose a consumer lives for periods 0, 1, . , , has income yt in each period t, consumption ct and initial wealth a0. The utility of the individual in each period is and the individual"s discount rate is . The individual can borrow or lend, cu t subject to their inter-temporal budget constraint, at interest rate r, where r . The goal ( t cn of the individual is to maximize intertemporal utility: tcu. Set up the bellman equation for the consumer"s problem. Using the bellman equation, find an expression for the optimal level of consumption in period t+1 as a function of ct, r and . Express the optimal choice of ct as a function of c0.
