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Problem_Set_5.pdf

Econ438_Midterm_Fall_2018.docx-Page 4 of 5 Econ 438

PS1_SuggestedSolution.pdf-ECON 490 – Economics of Entrepreneurship

• U ( C 1 ,C 2 ) = 2 log C 1 + log C 2 B r * • C 1 + C 2 1+ r * = Q 1 + Q 2 1+ r * . • KA =0 NUT =0 C 1 = 2 3  Q 1 + Q 2 1+ r *  C 2 = 1 3 (1 + r * )  Q 1 + Q 2 1+ r *  L = 2 log C 1 + log C 2 - λ  C 1 + C 2 1+ r * - Q 1 - Q 2 1+ r *  2 C 1 = λ 1 C 2 = λ 1+ r * . U 1 /U 2 = p 1 /p 2 2 C 2 C 1 = 1+ r * ⇒ C 2 1+ r * = C 1 2 C 1 + C 2 1+ r * = Q 1 + Q 2 1+ r * C 1 + C 1 2 = Q 1 + Q 2 1+ r * ⇒ C 1 = 2 3  Q 1 + Q 2 1+ r *  C 2 = 1 3 (1 + r * )  Q 1 + Q 2 1+ r *  . Q 1 = 100 Q 2 = 200 r * = 10% C 1 = 2 3  100 + 200 1 . 1  = 187 . 88 C 2 = 1 3

ECON | 442 | International Finance | • U ( C 1  C 2 ) = 2 log C 1 +

explain what you expect to happen to wages and the cost of living, and how the shock spreads through labor and goods markets. Hint: P T is set abroad. (5 lines max) Ans Note that P T is ﬁxed abroad, so: (i) only diﬀerences in P N aﬀect q and (ii) changes in A T are not passed on as reductions in P T . Second, note that P N = A T /A N , because both sectors compete for the same wor

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