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October 24th, 2010, 06:48 PM  #1 
Newbie Joined: Oct 2010 Posts: 3 Thanks: 0  Merton consumption model
Does anyone know why in Merton's optimal consumption and investment problem the consumption at time t can be bigger than the wealth at time t? How is it possible? For example, the proportion of wealth invested in the risky asset can be bigger than 1 because short selling is allowed. But what about consumption? The model can be found in http://en.wikipedia.org/wiki/Merton's_portfolio_problem 
October 29th, 2010, 12:04 AM  #2  
Member Joined: Sep 2010 Posts: 63 Thanks: 0  Re: Merton consumption model
Do you have a source that says it can be. This seems to contradict the following statement on Wikipedia: Quote:
 
October 29th, 2010, 05:29 PM  #3 
Newbie Joined: Oct 2010 Posts: 3 Thanks: 0  Re: Merton consumption model
That's the point. It says "fraction of wealth" and "consume", thus, he may consume more than his wealth.

November 19th, 2010, 11:54 AM  #4  
Member Joined: Sep 2010 Posts: 63 Thanks: 0  Re: Merton consumption model Quote:
 

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