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3 votes

Infinite marginal utility for vanishing consumption: Is this always true?

The reason for using a power utility function is typically not that it fits some intuition (and I also don't think this intuition is particularly convincing). It is rather that these utility functions ...
VARulle's user avatar
  • 7,044
2 votes

Two-period two-good optimal consumption problem

You can solve it in this way: $$\max_{\{(a_1,a_2)\in\mathbb{R}^2_+|(1+\rho)a_1+a_2=(1+\rho)w_1+w_2\}} \left[\left[\max_{\{(x_1,y_1)\in\mathbb{R}^2_+|p_{x,1}x_1+p_{y,1}y_1\leq a_1\}} u(x_1,y_1)\right]+\...
Amit's user avatar
  • 9,186
2 votes

Two-period two-good optimal consumption problem

I guess you can use a Bellman approach. Observe that optimal $x_2$ and $y_2$ are functions of $C_2$ and second-period prices - I suppress dependence on second-period prices for notational simplicity. ...
Jesper Hybel's user avatar
  • 3,521

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