Taste for variety: Model of Grossman and Helpman.

Variety expansionThe ModelOptimal expenditures◮ The maximization of intertemporal consumption path leads tothe condition on expenditures:E(t) ˙E(t) = R(t) ˙ − ρ; (25)◮ Which means, that expenditures should grow at the same rateas the interest rate on assets holdings minus discount rate;◮ Consumers may invest their holdings into firms’ shares with Rrate of return or into riskless bonds with ρ rate of return;◮ The condition on optimal expenditures is the no arbitragecondition, meaning, that composition of portfolios should notmatter.