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physicsguy142
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Homework Statement
Derive the Euler Equation of the dynamic programming problem:
[itex]\[max_{\{ z_t \}^\infty_{t=0}}
\sum_{t=0}^{\infty} \delta^t f(x_t, y_t, z_t)
\] [/itex]
subject to:
[itex] x_{t+1} = g_1(x_t, y_t, z_t),
\
y_{t+1} = g_2(x_t, y_t, z_t),
\
x_0 = x^0,
y_0 = y^0 [/itex]
and where [itex] \delta <1 [/itex]
Homework Equations
We can write the value function as:
[itex]V(x,y) = max_z [f(x, y, z) + \delta V(g_1(x, y, z), g_2(x, y, z))][/itex]
The Attempt at a Solution
The solution is characterized by 3 equations:
The first-order-condition at the optimal z* is:
[itex] \frac{\partial f(x, y, z^*)}{\partial z} + \delta[\frac{\partial V (g_1(x, y, z^*), g_2(x, y, z^*))}{\partial g_1(x, y, z^*)}\frac{\partial g_1(x, y, z^*)}{\partial z} + \frac{\partial V (g_1(x, y, z^*), g_2(x, y, z^*))}{\partial g_2(x, y, z^*)}\frac{\partial g_2(x, y, z^*)}{\partial z}] = 0[/itex]
Differentiating the value function with respect to each state gives us:
[itex]
\frac{\partial V (x, y)}{\partial x} = \frac{\partial f(x, y, z^*)}{\partial x} + \delta[\frac{\partial V (g_1(x, y, z^*), g_2(x, y, z^*))}{\partial g_1(x, y, z^*)}\frac{\partial g_1(x, y, z^*)}{\partial x} + \frac{\partial V (g_1(x, y, z^*), g_2(x, y, z^*))}{\partial g_2(x, y, z^*)}\frac{\partial g_2(x, y, z^*)}{\partial x}]
[/itex]
and
[itex]
\frac{\partial V (x, y)}{\partial y} = \frac{\partial f(x, y, z^*)}{\partial y} + \delta[\frac{\partial V (g_1(x, y, z^*), g_2(x, y, z^*))}{\partial g_1(x, y, z^*)}\frac{\partial g_1(x, y, z^*)}{\partial y} + \frac{\partial V (g_1(x, y, z^*), g_2(x, y, z^*))}{\partial g_2(x, y, z^*)}\frac{g_2(x, y, z^*)}{\partial y}]
[/itex]
I think I should be able to derive an Euler Equation with the above 3 equations, but I'm not sure how to manipulate the equations to get a meaningful answer.
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