- #1
physicsguy142
- 3
- 0
Homework Statement
Derive the Euler Equation of the dynamic programming problem:
\[max_{\{ z_t \}^\infty_{t=0}}<br /> \sum_{t=0}^{\infty} \delta^t f(x_t, y_t, z_t)<br /> \]
subject to:
x_{t+1} = g_1(x_t, y_t, z_t),<br /> <br /> \<br /> <br /> y_{t+1} = g_2(x_t, y_t, z_t), <br /> <br /> \<br /> x_0 = x^0,<br /> y_0 = y^0
and where \delta <1
Homework Equations
We can write the value function as:
V(x,y) = max_z [f(x, y, z) + \delta V(g_1(x, y, z), g_2(x, y, z))]
The Attempt at a Solution
The solution is characterized by 3 equations:
The first-order-condition at the optimal z* is:
\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
Differentiating the value function with respect to each state gives us:
<br /> <br /> \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}]<br /> <br />
and
<br /> <br /> \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}]<br /> <br />
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.
Last edited:
