Elements of Numerical Mathematical Economics with Excel

11.6. Dynamic economic problems solved with Discrete Dynamic Programming

Within this section, we will develop some basic discrete dynamic economic problems to show how the techniques seen so far are similarly applied. The first example is a typical optimal consumption and saving model.

Example 1 (optimal consumption and saving)

Let C _t   =   u _t be the consumption in period t, to which a logarithmic utility, namely U(C _t )   =   log(u _t ), is associated.

Let us assume the consumer generates his own output according to a Cobb–Douglas function as follows:

y t = A K t − 1 α with A and α positive constants .