Reference no: EM133636874

Question 

Suppose a household has the following lifetime utility function U = C 1-σ t - 1 1 - σ + β C 1-σ t+1 - 1 1 - σ , 0 < β < 1. The parameter σ controls how much the consumer likes to smooth. Its inverse, 1/σ is called the intertemporal elasticity of substitution (low σ means low desire for smoothing and a high willingness to substitute intertemporally). The household faces two within-period budget constraints of the form Ct + St = Yt Ct+1 = Yt+1 + (1 + rt) St . Let's assume that the household's income in the current period is Yt = 350 and income in the future period is Yt+1 = 400. The real interest rate rt is 0.05, or 5%, per period. The discount rate is β = 1 1.1 . (a) What are the choice/endogenous variables.