goods market 1

Question 1

Snational

Answer 1

Y-C-G

Sprivate = Y-T-C
Spublic = T-G

Question 2

intertemporal budget constraint

Answer 2

PVLC = PVLR

C1+C2/(1+r) = Y1+Y2(1+r)

Question 3

plot c2 against c1

Answer 3

vertical intercept is FV, horizontal intercept is PV

convex

slope = -(1+r)
giving up one unit of c1 gains 1+r units of c2

Question 4

lifetime utility fn

Answer 4

u(c1,c2) = u(c1) + Bu(c2)

Question 5

higher B means

Answer 5

future utility is worth more today, will be more patient

Question 6

utility max prob (constrained)

Answer 6

u(c1,c2) = u(c1) + Bu(c2) s.t. c1+c2/(1+r) = y1+y2/(1+r)

Question 7

utility max prob (unconstrained)

Answer 7

max u(c1,c2) = u(c1) + Bu((1+r)(y1-c1)+y2)

Question 8

FOC of utility max prob

Euler’s eqn

Answer 8

u’(c1)/Bu’(c2) = 1+r

MRS of c1 for c2 = relative price of c1 in terms of c2 (IC=BL)

Question 9

if r=p, u’(c1)=u’(c2) implies

Answer 9

c1=c2

Question 10

higher p/ lower B means

Answer 10

more impatient –> consume more today

Question 11

u’(c1) = (1+r)/(1+p)u’(c2)
if r>p,

Answer 11

u’(c1)>u’(c2),

Question 12

u’(c1)>u’(c2), what is the r/s btn c1 and c2

Answer 12

c1<c2

MU is diminishing and MU of c1 is higher

Question 13

r>p means

Answer 13

c2>c1

Question 14

increase in y1 impact on c1 and s1

Answer 14

increase PVLR, increase in c1 and c2
increase in s1 as increase in c1 is xMPC

Question 15

increase in wealth and y2 on c1 and s1

Answer 15

increase in c1 and c2
since y1 is unchanged, fall in s1

Question 16

changes in r impact on c1 and c2

Answer 16

pivots BL along endowment pt (y1, y2).

income effect: if consumer is a saver, increase in r makes him better off, increase in c1 and c2

sub effect: higher r raises opt cost of c1, fall in c1 and increase in c2

SE dominates, c1 falls