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1 IXS R OT IT FOR ULITIO ppedi I ompeiive quilibium wih Icomplee Make Thi appedi give he em o equaio i em o aioa vaiable chaaceiig he compeiive equilibium ude he icomplee make eig emad equaio o leible pice eco houehold 4 Suppl equaio o leible pice eco ood eco im 4 emad equaio o ick pice eco houehold R 4 Suppl equaio o ick pice eco oood eco im i Q M Q θ θ αβ αβ θ θ 43 ice ide i ick pice good eco [ ] 44 Real magial co i he ick pice eco ψ σ ψ φ M 45 Make cleaig equaio o leible pice good

2 46 Make cleaig codiio o ick pice good 47 ggegae ice Ide [ ] 48 Relaio bewee headlie ad ick pice ide 49 ggegaio equaio 5

3 3 ppedi II eivaio o Welae Gai ociaed wih iee Tageig Rule Welae gai i give b a U V / / a V a U V whee ad U Uig U V we ca olve o a V V

4 4 ppedi III leaive Make Sucue leaive Sucue o omplee Make We coide a eig i which coume ca wie coac o iue agai idiocaic icome ik bu ol ae beig aiged o a paicula eco Oe could egad hi a a complee make eig codiioal o woke aigme o eco which i deemied eae beoe iuace coac ae wie I ohe wod a houehold cao iue agai coeco icome ik Houehold i he Fleible ice Seco epeeaive houehold i he leible pice eco maimie i lieime uili give b equaio ubec o he ollowig budge coai W R 5 whee i he quai o oepeiod omial ik ee dicou bod bough i peiod ad mauig i peiod Maimiaio wih epec o ield he ule equaio R 5 Houehold i he Sick ice Seco epeeaive houehold i he ick pice eco maimie i lieime uili give b equaio ubec o he ollowig budge coai W d d R 53 I ode o olve he model b lieaiig i aoud he ead ae wih available echique we aume ha houehold ace a mall quadaic adume co whee i a paamee ad i he ead ae value o he bod holdig I ode o olve he model b lieaiig i aoud he ead ae wih available echique we aume ha houehold ace a mall quadaic adume co whee i a paamee ad i he ead ae value o he bod holdig

5 5 whee epee he quai o oe peiod omial ikle dicou bod bough i peiod ad mauig i peiod Maimiaio wih epec o equaio ield he ule R 54 od make clea: 55 quaio o ppedi I ad 555 epeed i em o aioa vaiable deie he em o equaio ha combied wih he moea polic ule ad eogeou ochaic pocee o ad deemie he equilibium pah o he ecoom ude hi eig Geeal ae wih edioaied Houehold i ach Seco We coide a moe geeal cae whee houehold i each eco ca be cedi coaied Le > ad > be he acio o houehold ha have acce o iacial make i he leible pice eco ad i he ick pice eco epecivel So i hi geeal eig hee ae ou diee kid o age i he ecoom baed o he eco o ecoom ad acce o iacial make Hee agai we aume ha houehold wih acce o iacial make ca ol iue agai icome ik e po Houehold i he Fleible ice Seco Ucoaied Houehold epeeaive houehold ha ha acce o iacial make i he leible pice eco maimie i lieime uili give b equaio ubec o he ollowig budge coai 3 W R 56 Maimiaio wih epec o ield he ule equaio 3 I ode o olve he model b lieaiig i aoud he ead ae wih available echique we aume ha houehold ace a mall quadaic adume co whee i a paamee ad i he ead ae value o he bod holdig

6 6 R 57 The labo uppl deciio o he houehold i give b W 58 oaied Houehold The epeeaive cedicoaied coume i he leible pice eco maimie lieime uili give b equaio ubec o he ollowig budge coai W 59 The labo uppl deciio o he houehold i give b W 6 Houehold i he Sick ice Seco Ucoaied Houehold epeeaive houehold i he ick pice eco ha ha acce o iacial make maimie i lieime uili give b equaio ubec o he ollowig budge coai 4 R d d W 6 Maimiaio wih epec o ield he ule equaio R 6 4 I ode o olve he model wih available echique b lieaiig i aoud he ead ae we aume ha houehold ace a mall quadaic adume co whee i a paamee ad i he ead ae value o he bod holdig

7 7 The labo uppl deciio o he houehold o a im ideed b i give b W 63 oaied Houehold epeeaive cedicoaied houehold i he ick pice eco maimie i lieime uili give b equaio ubec o he ollowig budge coai W d d 64 Labo uppl deciio o he houehold o a im ideed b i give b W 65 Fim Fleible ice Seco Fim i he leible pice eco ae pice akig ad heeoe he pice o he leible pice good i give b equaio 7 ombiig hi wih he labo uppl deciio o houehold give b equaio 58 ad 6 ad ecogiig ha ad he uppl ucio o im i leible pice eco ae give b 66 67

8 8 Sick ice Seco Sice im ae mmeic i equilibium he will all chooe he ame pice 5 The magial co o im held b ucoaied ad coaied houehold ae heeoe give b M M φ ψ σ 68 M M φ ψ σ 69 whee we have ued he ac ha ad ggegaio Houehold demad o leible pice ad ick pice good i give b epeio imila o equaio 9 4 ad 5 wih ad eplaced b i ad i whee i Toal demad o he leible pice good i give b whee 7 7 d he oal demad o he ick pice good i give b 7 Make leaig The make o he leible pice good clea 73 5 Thoe who ca chage pice will chooe he ame pice while ohe will coiue wih he pice ied ealie

9 9 whee ad The make o he ick pice good clea 74 whee ad The bod make clea 75 quaio o ppedi I ad epeed i em o aioa vaiable deie he em o equaio ha combied wih he moea polic ule ad eogeou ochaic pocee o ad deemie he equilibium pah o he ecoom ude hi geeal eig