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    RCK Model

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    dReamLAND

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    RCK Model

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    dReamLAND
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    RCK model

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    RCK Model

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    dReamLAND

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    Tutorial 4

    Macroeconomics-II (HSL612)
    Date: 16/02/2024

    [Question 1]
    Consider the economy of the Ramsey-Cass-Koopmans model with population growth and
    technological progress. Initial household size and workforce are both normalized to H =
    L(0) = 1. As a shorthand, variables that are functions of time carry time indices as in
    discrete time (e.g. x (t)is spelled out as xt ).

    1.1. Household’s problem:


    The representative household’s present value of utility is given by
    Z ∞
    u(Ct )exp((n − ρ)t)dt (1)
    t =0

    Moreover, the household faces budget constraints (2), the initial condition(3) and the transver-
    sality condition (4):

    Ẋt =rt Xt + Wt Lt − Ct Lt (2)


    X (0) >0 (3)
    ′
    lim XT u (CT )exp((n − ρ) T ) = 0 (4)
    T →∞

    where Ct is per-capita consumption, Xt is household’s total wealth, rt is the return to capital


    and Wt are real wages per unit of labor. Lt grows at rate n and the rate of technological
    progress At is g and ρ is the household’s time preference rate.

    (a) Show that the evolution of household’s wealth per-effective-worker follows:

    ẋt = rt xt + wt − ct − (n + g) xt (5)

    X W C
    where x ≡ AL is wealth, w ≡ A is the real wage, and c ≡ A is consumption, all in per-
    effective worker terms.

    (b) Show that under the CRRA-utility function:

    C 1− θ
    u(C ) =
    1−θ

    the household’s present value of utility is given by


    Z ∞ 1− θ
    ct
    A (0 )1− θ exp(−ψt)dt, where (6)
    0 1−θ
    ψ = ρ − n − (1 − θ ) g > 0 (7)

    (c) Set up the Hamiltonian function using (5) and (6) and derive the first-order conditions.
    (d) Derive the Euler-equation and interpret it economically.

    1
    1.2. Firm’s Problem
    The representative firm’s profits are given by

    πt = F ( At Lt , Kt ) − Wt Lt − Rt Kt

    where Rt = rt + δ (δ is the depreciation rate). Production F ( At Lt , Kt ) is of Cobb-Douglas


    type with labor-augmenting technology and constant returns to scale:

    F ( A t L t , K t ) = ( A t L t )1− α K t α

    (a) Set up the profit maximization problem of the firm.


    (b) Derive and interpret the first-order conditions.
    (c) Reformulate the optimality conditions using the capital per-effective-worker definition
    K
    k = AL

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