0
$\begingroup$

I have an OLG model with constant level of technology and population. The utility of agent who is born in period t is:

U() = c1,t + 1/1+pC2,t+1

My textbook asks me to write the maximization problem and FOC for the agent who is born in period t with the assumption that agent can not refuse the consumption in any of the periods.

I know how to write maximization problem

U() = c1,t + 1/1+pC2,t+1 - max c1,t ≥0 С2,t+1 ≥0 c1t + st = wt c2,t+1 = (1 + r,t+1)st

The only thing which I do not get is why we need the assumtion that agent can not refuse the consumption in any of the periods. What does it give us?

I am sorry of the question is obvious, I am just studying OLG model on my own and do not get everything.

$\endgroup$
1
  • $\begingroup$ Do you mean $U(t) = c_{1,t} + \frac{1}{1 + \rho}\left(c_{2,t+1}\right)$? $\endgroup$ – Kenneth Rios Sep 29 '18 at 23:29
1
$\begingroup$

I think all the textbook is trying to say is that there can be no corner solutions to your maximization problem.

Not refusing consumption in any period, I think translates to consumption in each period > 0.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.