ECON482 Midterm: ECON 482 UofA E482A210
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This assignment will be marked out of 150. 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 individual can borrow or lend, subject to their inter-temporal budget constraint, at interest rate r, where r and r < 2 . The goal of the individual is to maximize intertemporal utility: The utility of the individual in each period is cu t. Set up the bellman equation for the consumer"s problem. Using the bellman equation, show how to 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.
