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1. (a) Suppose in year 1 economic activities in a country constitute only production of
wheat worth Rs. 750. Of this, wheat worth Rs. 150 is exported and the rest remains
unsold. Suppose further that in year 2 no production takes place, but the unsold wheat of
year 1 is sold domestically and residents of the country import shirts worth Rs. 250. Fill
in, with adequate explanation, the following chart :
Year GDP = Consumption + Investment + Export - Import
1 750 0 600 150 0
2 -250 600 -600 0 -250
(are these correct? )
2.(isi 2007----me 2 q 8)
3.. Suppose an economic agent’s life is divided into two periods, the first period
constitutes her youth and the second her old age. There is a single consumption good, C ,
available in both periods and the agent’s utility function is given by
U(C1,C2)=(C1^1-a) -1/1-a + (1/1+p) ( C2^1-a) -1 /1-a
where the first term represents utility from consumption during youth. The second term
represents discounted utility from consumption in old age, 1/(1+ ρ ) being the discount
factor. During the period, the agent has a unit of labour which she supplies inelastically
for a wage rate w . Any savings (i.e., income minus consumption during the first period)
earns a rate of interest r , the proceeds from which are available in old age in units of the
only consumption good available in the economy. Denote savings by s . The agent
maximizes utility subjects to her budget constraint.
i) Show that θ represents the elasticity of marginal utility with
respect to consumption in each period.
ii) Write down the agent’s optimization problem, i.e., her problem
of maximizing utility subject to the budget constraint.
iii) Find an expression for s as a function of w and r .
(iv)How does s change in response to a change in r ? In particular,
show that this change depends on whether θ exceeds or falls short
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