1Euler Equat ionConsider the following (almost identical) two-period econ omies (t = 1,2)Есoпoту 1 Ecoпоту 2K110.30.311zF(K)zKa0.90.90.51u(c)log(c)log(c)Suppose that at the end of t = 2 the depreciated stock of capital (1 – 8)K2 issold. Which economy experiences higher consumption growth between period 1and period 2? Show why!• Hint: Combine Euler Equation with Resource Constraint at t = 1 andt = 2 to solve for K2; plug back into euler equation

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1 Euler Equation Consider the following (almost identical) two-period economies (t = 1,2) K₁ a 2 zF(K) B 8 u(c) Economy 1 Economy 2 1 0.3 1 zkº 0.9 0.5 log(c) log(c) 1 0.3 1 zKa 0.9 1 Suppose that at the end of t = 2 the depreciated stock of capital (1-8) K₂ is sold. Which economy experiences higher consumption growth between period 1 and period 2? Show why! Hint: Combine Euler Equation with Resource Constraint at t = 1 and t=2 to solve for K2; plug back into euler equation

1 Euler Equation Consider the following (almost identical) two-period economies (t = 1,2) K₁ a 2 zF(K) B 8 u(c) Economy 1 Economy 2 1 0.3 1 zkº 0.9 0.5 log(c) log(c) 1 0.3 1 zKa 0.9 1 Suppose that at the end of t = 2 the depreciated stock of capital (1-8) K₂ is sold. Which economy experiences higher consumption growth between period 1 and period 2? Show why! Hint: Combine Euler Equation with Resource Constraint at t = 1 and t=2 to solve for K2; plug back into euler equation

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter17: Capital And Time

Section: Chapter Questions

Problem 17.5P

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