ECON402 Study Guide - Midterm Guide: Discounting, Search Theory, Pareto Efficiency
20 May 2018
School
Department
Course
Professor
Name___________________________
Student # ______________________
University of Waterloo
Department of Economics
ECON 402
Prof. Kate Rybczynski
Example Final Exam
Instructions:
TURN OFF ALL CELL PHONES AND PAGERS!
You have 2.5 hours to complete the exam.
It is a closed book exam and no “cheet sheets” are permitted.
EXPLAIN for full marks.
Use pen and do not use whiteout.
No calculators are permitted.
1. Consider an overlapping generations model without production, and
without a discount factor.
U = ln(C1t) + ln(C2,t+1)
Lt people are born in period t, and Lt = (1+n)Lt -1
Individuals endowed with A units each of the economy's single good when
they are born.
Goods can be stored, and 1 unit stored yields X>0 units next period,
where X<(1+n).
a) Will there be any intergenerational trade in this economy? Why or why
not? (2)
b) What is the equilibrium for this economy? (note: you should solve for
the decentralized equilibrium, not the social planner's problem, and find
consumption in both periods) (5)
2
b) Let s be the fraction of endowment stored by the young and be
constant across time.
What is total consumption per person endowment unit (AL) as a function
of s AND what value of s maximizes consumption per person ?(3)
d) Explain whether the outcome from part a) is Pareto efficient and how
the social planner could improve the situation. (2)
3
