Competitive equilibrium model in growth theory
Basic assumptions edit
The representative agent lives for two periods. So each period t, the population consists of young agents born in period t and old agents born in t - 1.
Single good economy where production technology is constant return to scale.
Agents utility is a function of his two-period lifetime consumption c_b and c_a of the following form
The capital accumulation process for the economy is defined as follows: Firms own the technology but no capital. This means, for each period t, the representative firm faces the profit maximization problem given current capital and labor supply. Assuming perfect competition, the real interest rate and real wage are then equal to marginal products of capital and labor respectively. Constant return to scale then imply all firms in the market earn zero profits.
Capital is own by The initial population at period 0 is given some initial endowment of capital k_0.
On the consumer side, in period 0, the initial population
in each period the young agents supply labor