Question

Using The Euler Equation, Show Steps To Work Out The PDV Of Consumption.

An agent lives for 2 periods and gains utility only from consumption. The agent discounts future consumption at rate where 0 < theta < 1 . The agent consumes c and saves s at interest rate r in the first period of life from income y. In the second period, the agent consumes from savings plus interest earned but must pay a fixed flat tax

Answer 1

The PDV of consumption can be worked out using the Euler equation, which relates consumption and discount rate. The equation is C=C0+MPC(Y-T). Substitute the given values to calculate the PDV of consumption.

Step-by-step explanation:

The PDV (Present Discounted Value) of consumption can be calculated using the Euler equation, which expresses the relationship between consumption and discount rate. The equation is:

C = C0 + MPC(Y - T)

Where C represents consumption, C0 is the consumption when national income (Y) is zero, MPC is the marginal propensity to consume, Y is the national income, and T represents taxes. To find the PDV of consumption, you need to substitute the given values and calculate the equation.