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StoneGeary preferences. Assume that the usual conditions of the Ramsey model hold, except that the representative households instantaneous utility function is modified from equation (2.10) to the StoneGeary form: u(c) = (c c)1 11 where c 0 represents the subsistence level of per capita consumption.
a. What is the intertemporal elasticity of substitution for the new form of the utility function?
If c > 0, how does the elasticity change as c rises?
b. How does the revised formulation for utility alter the expression for consumption growth in equation (2.9)? Provide some intuition on the new result.
c. How does the modification of utility affect the steady-state values k and c?
d. What kinds of changes are likely to arise for the transitional dynamics of k and c and, hence, for the rate of convergence? (This revised system requires numerical methods to generate exact results.)


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