OLG model with capital revision Flashcards
(14 cards)
what does each of the initial old people own
K1/N0 units of capital stock each, they get a return of 1+r_1 on the capital by lending it to the firms
what is the first step within the OLG model with capital?
profit maximisation by the representative firm, the firm is a perfectly competitive price taker. with profit function Yt − (rt + δ)Kt − wtAtNt where (rt + δ)Kt is the cost of capital each period and the wtAtNt is the cost paid to the workers. Take FOC with respect to Nt and Kt
why under constant returns to scale must the economic profit be zero?
because under constant returns to scale, if positive profits were possible then by scaling up they can make infinite profits which is nonsense. therefore rt and wt must be such that profits are zero at equillibrium
what does a constant returns to scale mean for the production function and per efficient worker?
what does the equillibrium require at all points in time?
what are the two assumptions that allow deeper analysis of the dynamics of capital ?
that preferences are identical and preferences are homothetic
what does homothetic preferences imply?
what does identical preferences across generations imply?
how does a 45 degree line on the k_t+1, k_t graph help?
how do you determine the time invariant value of k that maximises the consumption?
how can you show that a government with unlimited powers of taxation can create a pareto superior feasible allocation ?
with consumption enlarged, the government can allocate resources such that consumption in both period is at least equal or larger than before
what is the intuition behind the pareto superior feasible allocation by the government?
under cobb douglas preferences what does this mean for the savings rate?
what must be assumed to be true for the golden rule to be the the pareto superior feasible allocation?
