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Questions › DSE › DSE 2018 › Q17
4 marks, −1Macroeconomics › Consumption and investment › Intertemporal consumption and the Euler equationHardabout 3 min

DSE 2018 Question 17: Consumption and investment

A consumer lives for two periods and chooses consumptions C1C_1C1​ and C2C_2C2​ to maximise utility u(Ct)=σσ−1 ⁣(Ctσ−1σ−1)u(C_t) = \dfrac{\sigma}{\sigma - 1}\!\left(C_t^{\frac{\sigma - 1}{\sigma}} - 1\right)u(Ct​)=σ−1σ​(Ctσσ−1​​−1). Future consumption is discounted by ρ\rhoρ. The intertemporal elasticity of substitution in consumption between the two periods is

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A consumer lives for two periods and chooses consumptions C₁ and C₂ to maximise utility u(Cₜ) = σ/(σ - 1)(Cₜ^((σ - 1)/σ) - 1). Future consumption is discounted by ρ. The intertemporal elasticity of substitution in consumption between the two periods is (A) σ (B) 1 (C) (σ - 1)/σ (D) σ/(σ - 1)

Also written as: A consumer lives for two periods and chooses consumptions C_1 and C_2 to maximise utility u(C_t) = sigma/(sigma - 1)(C_t^((sigma - 1)/sigma) - 1). Future consumption is discounted by rho. The intertemporal elasticity of substitution in consumption between the two periods is

Consumption and investment has come up 74 times in 7 exams since 2005.

What this question tests

This question is on Intertemporal consumption and the Euler equation, part of Consumption and investment in Macroeconomics.

Choosing consumption over two periods and the condition that links them.

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