Draw the Indifference Curve associated with the utility function. What type of preferences are reflected in terms of marginal utility? Explain your answer.

by | Sep 20, 2021 | Uncategorized | 0 comments

Consider a utility function given by U (c1 ,c2) = 4c1 + 2c2 involving young and old consumption for a typical individual in an OLG setting.
1. Draw the Indifference Curve associated with the utility function. What type of preferences are reflected in terms of marginal utility? Explain your answer.
2. Given the budget set in an intertemporal decentralized decision-making setting, what are the possible equilibrium solutions one can obtain in this scenario? Show the possible solutions on your graph.
3. If an individual values the marginal utility of consumption when young to be more worth more than the marginal utility of consumption when old, how would this impact the equilibrium obtained in part ii of the question?
4. If an individual values the marginal utility of consumption when old to be more worth more than the marginal utility of consumption when young, how would this impact the equilibrium obtained in part ii of the question?
5. Will the decentralized decision-making yield Golden Rule solution? Explain your answer in 4-5 sentences.

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