Please see the attachment. I require very specific explanations for each part. If necessary, assumptions may be made but please make these explicit and make sure they are reasonable so that I can follow what you did. Also make the solutions as technical as possible.
(See attached file for full problem description)
a) The rate of interest is defined by
1/(1 + r) = p2/p1 = β(y1/y2).,
r - Rate of interest
P1, P2 - prices in the two periods
Y1,y2 - Endowments for the two periods
The general relationship between prices and rates of return:
1 + r =[payoff + resale price] / price ,
Where r is a one-period return.
b) Suppose that in the two-period production economy the consumer has
endowments y1 = y and y2 = 0 of the good, and endowment n2 = 1 of labor in the second
period. The consumer has log utility, as a function only of the two consumptions. There
is 100 percent depreciation, and the production function is f(k, n) = kαn1−α.
The changes in the real wage must come from shifts in the labor demand curve (or else changes in population or participation) in this ...
The rate of interest is computed. The tradable capital goods, wages, interest rates and taxes for consumptions are discussed.