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Assignment2 2023

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Ethan Li
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19 views

Assignment2 2023

Uploaded by

Ethan Li
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Macroeconomic Theory 1 A

Assignment 2

Question 1. [Capital Adjustment] (20%) Consider an economy populated by a large


number of identical households. Each household has a preference given by
1
X
t
u(ct ); 0 < < 1;
t=0

where ct denotes the consumption. Households use capital, kt , to produce consumption goods
and investment goods:
ct + xt f (kt ):

The utility functions and production functions are standard (i.e. continuous, twice di¤eren-
tiable, increasing, strictly concave, f (0) = 0; limx!0 f 0 (x) = 1; limx!1 f 0 (x) = 0; limx!0 u0 (x) =
1; limx!1 u0 (x) = 0). The capital available in the next period, kt+1 , is a function of the
investment, xt , and the current capital, kt :

xt
kt+1 = kt ;0 < < 1: > 0
kt

The technology captures the idea that the yield of an additional unit of investment is de-
creasing in the size of the existing capital stock.

1. (5 points) Write down the optimization problem of the economy.

2. (5 points) Write down the …rst order conditions of the problem.


kt=0的case 在finite時，for t < T這已經
被rule out，不過看著maximization problem
3. (5 points) Discuss the existence and uniqueness of the steady state. ，確實k0=0可以讓那會導致後續一堆數都是
0的SS，但這邊要如何跟f '(0)爆掉的argument
融貫
4. (5 points) Describe the impact of an increase in the productivity parameter on the
steady state level of capital and consumption. 如何describe？

Question 2. [Investment] (40%) Consider an economy populated by a large number

1
of households with utility functions given by
1
X
t
u(ct ); 0 < < 1:
t=0

The aggregate capital accumulation process:

kt+1 = (1 )kt + xt :

where is the depreciation rate of capital, and xt is investment. Capital cannot be used to
produce directly, but one unit of capital can be transformed into one unit of sector 1 inputs or
one unit of sector 2 inputs. We denote the number of sector 1 inputs by q1t and the number
of sector 2 inputs by q2t . Sector 1 inputs are used to produces consumption goods, ct , and q1t
units of Sector 1 inputs can produce z1 f1 (q1t ) units of consumption goods, where z1 represents
the e¢ ciency of sector 1 production. Sector 2 inputs are used to produces investment goods,
xt , and q2t units of Sector 2 inputs can produce z2 f2 (q2t ) units of investment goods, where z2
represents the e¢ ciency of sector 2 production. The production functions f 1 (q1t ) and f 2 (q1t )
satisfy the standard assumptions. 這題沒有一個general生產函數f，完全是透過f1 & f2進行。

1. (10%) Write down the optimization problem of the economy.

2. (10%) Write down the …rst order conditions of the problem.

3. (10%) Discuss the existence and uniqueness of the steady state.

4. (10%) Someone argues that an increase in z2 increases q2 and crowds out the inputs
for sector 1, q1 , and thus, decreases the consumption in the steady state. Do you agree
or disagree this statement? Prove your argument by showing how an increase in z2
in‡uences the steady state consumption.

Question 3. [Capital in Utility] (40%) Consider the following households’problem.


Households use capital, kt , to produce consumption goods and investment goods:

ct + xt f (kt ),

where f (k) = Ak is the production technology, and ct and xt denotes the consumption and
investment, respectively. The accumulation of capital follows

kt+1 = (1 )kt + xt .

The capital in the economy also provides shelter and living services like a house. For a
household who is holding kt units of capital and consume ct units of consumption goods, its

2
utility at time t is
u (ct ; kt ) = ct1 kt ,

where 2 (0; 1) represents the relative importance of capital with respect to consumption
in the household’s preference. A household makes consumption and capital accumulation
decisions to maximize its lifetime utility:
1
X
t
u (ct ; kt ) , 0 < < 1;
t=0

Following the instructions to analyze the household’s behavior. Do not worry about the
nonnegativity constraints and transversality constraints.

1. [10%] Write down the household’s optimization problem and the …rst order conditions

2. [10%] Solve for the steady state consumption and capital stock

3. [10%] Show the existence and uniqueness of the steady state capital and consumption

4. [10%] Go as far as you can analyzing how an increase in in‡uences the steady level
of capital, k , and consumption, c . Explain the intuition behind.

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