# Answer to Question #40980 in Macroeconomics for Yuki

Question #40980

Let Ct denote the individual's consumption of nondurables on date t, and let Dt be the stock of durable goods the consumer owns at date t. A stock of durables yields its owner a proportional service flow each period it owned. Income process is deterministic. The representative consumer has a perfect foresight about his or her income process and maximizes.

U1= Σβt[θlogCt + (1 − θ)logDt] (∞ t=1). subject to Dt = (1−δ)Dt−1 +X and At = (1+r)(At−1 +Yt −Xt −Ct)

where A0 and D0 is initially given. Here At is a financial wealth at the end of date t, Yt is date t income and r is a market interest.

1) What are the choice variables in this maximization problem? Derive first order conditions.

2)Using FOC, show that

θ/Ct=(1-θ)/Dt+β(1−δ)(1-θ)/Dt+1+β^2(1−δ)^2(1-θ)/Dt+2+・・・ and interpret it.

3)Using FOC, show that

(1-θ)Ct/θDt=1-(1−δ)/(1+r)

4)Assume β(1+r)=1 and let ι ≡ 1-(1−δ)/(1+r), show that the optimal level of C1 and D1 are given by

C1=θr/(1+r)[(1+r)A0+(1−δ)D0+Σ(1/(1+r))^t-1Yt]

D1=(1-θ)r/(1+r)ι["]

U1= Σβt[θlogCt + (1 − θ)logDt] (∞ t=1). subject to Dt = (1−δ)Dt−1 +X and At = (1+r)(At−1 +Yt −Xt −Ct)

where A0 and D0 is initially given. Here At is a financial wealth at the end of date t, Yt is date t income and r is a market interest.

1) What are the choice variables in this maximization problem? Derive first order conditions.

2)Using FOC, show that

θ/Ct=(1-θ)/Dt+β(1−δ)(1-θ)/Dt+1+β^2(1−δ)^2(1-θ)/Dt+2+・・・ and interpret it.

3)Using FOC, show that

(1-θ)Ct/θDt=1-(1−δ)/(1+r)

4)Assume β(1+r)=1 and let ι ≡ 1-(1−δ)/(1+r), show that the optimal level of C1 and D1 are given by

C1=θr/(1+r)[(1+r)A0+(1−δ)D0+Σ(1/(1+r))^t-1Yt]

D1=(1-θ)r/(1+r)ι["]

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