1. The Ramsey Model. Assume that an infinitely-lived agent receives utility from consumption in the form u, = In(c;). She discounts utility at a constant rate 5 > 0. An aggregated output good y is produced from capital k that depreciates at a constant rate d. The initial capital stock is k9. The output good can be either invested to increase the capital stock or used for consumption ce. There is no technological progress. Derive the optimal consumption path over time. 1) Uist objective function(s), constraint(s), parameter(s), control and state variable(s). Set up the current value Hamiltonian. Derive the static and the dynamic FOC. Derive the optimal growth rate of consumption. Interpret. Set up the two equations which characterize a steady state in k and c. Also draw a figure which shows the steady state. v) Indicate in your figure from (iv) the effect of a higher utility discount rate 6 on the steady state values for k and c. Interpret. 4, DHSS— model. A society receives welfare from consumption, w, = w(C;), which is discounted at rate > 0. The economy produces an aggregated output ¥ with constant technology from a capital stock K; that depreciates at rate d, and a resource R; that is extracted at no cost from afinite and known resource stock Sy. Output ¥ can be invested or consumed. From the first-order congitions, we can derive the following dynamic equation for consumption growth: CO _1 c@ a4) Yue = FZ is the marginal product of capital and 9 = “COO. Assume that output is produced with the Constant Elasticity of Substitution (CES)-production funetion Y(K,R) = (aK~® + (1-9) where 0 <@ <1and@ > —1are parameters. i) Derive the marginal product of capital ¥x. li) What is (for every given K_) the limit of Yi as R goes to zero (formally: What is Timp 9 Yq (K,R))? How does your answer depend on the size of 8? Consider the two cases —1< 0 < Oandé > 0. ill) What does your result from (i) imply for long-run consumption growth? Is it : gt possible to have non-declining consumption in the long run, that is SO > 0? iv) Interpret the role which the size of @ plays for your answer to (il). Hint: o = <5 is the elasticity of substitution between physical capital K and R.