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Home / Questions / Bracketing and Rational Addiction Part 1 Consider an agent who consumes in two

Bracketing and Rational Addiction Part 1 Consider an agent who consumes in two


Bracketing and Rational Addiction Part 1 Consider an agent who consumes in two periods, P1 and P2. There is no time discounti Bracketing and Rational Addiction Part 1 Consider an agent who consumes in two periods, P1 and P2. There is no time discounting. In P1 they are not addicted to the drug d and consume it casually in order to optimize U1(d, x): U (d, x;) = 0.11n(d) +0.51n(x) Budget = 100 = 500, + 20x, Leading to: MU/(d,) = 0+ MU,(x)) = 0.5 Find the optimal d1 and x1 for the first period. Show all work. Part 2 In the second period, they no longer enjoy x1 as much due to their addiction to d. In period two they finally recognize that the drug lowers their happiness in period 2 because they have a resistance to it. Note d1 is no longer a variable, you have solved for it above in part 1. Substitute in your value for d1 from part 1 immediately. Uz(d», x)) = 0.1 In(dz) + 0,5 *In(x2) Budget, = 100 = 50d2 + 20x2 0.57d Leading again to: MU2(da) = -1;MU,(x) = - Now find the optimal consumption of d2 and 2 for the second period. Show all work.

Feb 07 2020 View more View Less

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