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ECON4060H Take‑Home Exam
DUE BY 8:00PM EASTERN TIME ON APRIL 20TH. UPLOAD YOUR ANSWERS TO BLACKBOARD.
Total points: 50.
Instructions
1. This exam is open‑book. References allowed include lecture slides, course handouts, personal
notes, and the reading list of the course.
2. Any form of collaboration or asking help from anyone is prohibited. Answers that appear very
close to each other will be inspected for possible collaboration.
3. If answers are hand written, writing must be legible.
4. You can use any programming languages. Python and/or R are recommended.
5. All computer programs must be submitted in their original formats that are used to obtain an‑
swers. Computer programs submitted in the PDF format or as images will be discarded and
result in zero marks. Original formats of programs can be plain text files with suffix .py or .R,
they can be also saved in Jupyter notebooks.
6. If there are multiple files to submit, please consider to compress them into one zip file for sub‑
mission.
7. Write your name and student ID number in all files you submit.
8. For full credit, show necessary steps and necessary explanation.
Question 1
Consider the intertemporal decisions of an individual. The individual is born in period 0, lives for +1
periods, and dies at the end of period . At the beginning of any period , the individual’s asset level
is , which is used for production. The amount of production is with 0 < < 1. Produced output
is used for consumption and for asset in the future. The budget constraint is
+ +1 = , for = 0, 1, 2,⋯ , .
The initial asset value 0 > 0 is given. When the individual dies, she/he leaves no bequest, that is,
+1 = 0.
The utility flow from consumption in period is given by () = ln(). The discount factor is with
0 < < 1.
1. (4 points) Formulate the individual’s dynamic optimization problem. You can use the Bellman
equation, but do not have to. Be thorough in describing the problemmathematically.
Shutao Cao 1
ECON4060H Take‑Home Exam, 2022 Winter 19 April 2022
2. (6 points) Suppose that the individual lives for 3 periods, i.e., = 2. Solve for the optimal
consumption in all periods. Do not use programming, solve the problemwith algebra using the
backward induction and optimal conditions. Show necessary steps.
3. (5 points) Suppose that the individual lives for 11 periods, i.e., = 10. Write a program to
numerically solve for the individual’s life‑cycle choices. Plot the optimal consumption and the
asset level over the life cycle. In doing so, you can use these values = 0.5, 0 = 1, = 0.7, or
set them to values of your own choice. Hint: you can either program by extending the pattern
displayed in the second part above, or solve for the value function with backward induction.