Re: Past ISI questions

Posted by L on Apr 22, 2015; 7:19am
URL: http://discussion-forum.276.s1.nabble.com/Past-ISI-questions-tp7596244p7596289.html

Hi Rajat
I have posted solution for Q.10 in another thread. However, I am posting it again over here.
 Q. 10. Budget Constraint: (1+R) Cm + Co = (wh - e(1+R) ) (1+R)
 first order condition: (dU/dCm)/(dU/dCo) = u'(Cm)/(beta* u'(Co) = 1+R

b) We can write it in form of profit maximization
 Z = wh - e(1+R) .......where the profit is used for consumption in period 2 & 3.
dZ/ de = wh'(e) - (1+R) = 0
h'(e) = (1+R)/w

if W increases then h'(e) decreases. H is a concave function, so, if you plot h w.r.t e and isoprofit lines, then you will see optimal education will increase as slope of isoprofit line decreases.

Similarly, if R increases, then, h'(e) increases, then, it will lead to less education.