1-7 There is one period. Assume a representative agent with utility function U(c) = . In parts c) through i) assume the following: • 7 = 2 and 6 = .94. • Consumption at t = 0 is Co = 25. • At t = 1 one of two states 01 and 02 eventuate with probability 7₁ = respectively. . There are two complex securities s¹ and s². • s¹ has a payoff of 23 in 01 and 27 in 02. s² has a payoff of 21 in 0₁ and 32 in 02. .6, and T2 = .4,
1-7 There is one period. Assume a representative agent with utility function U(c) = . In parts c) through i) assume the following: • 7 = 2 and 6 = .94. • Consumption at t = 0 is Co = 25. • At t = 1 one of two states 01 and 02 eventuate with probability 7₁ = respectively. . There are two complex securities s¹ and s². • s¹ has a payoff of 23 in 01 and 27 in 02. s² has a payoff of 21 in 0₁ and 32 in 02. .6, and T2 = .4,
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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(b) Derive an expression for the stochastic discount factor mt+1?
(c)What are the prices q0s1and q0s2 of complex securities s1 and s2 at t = 0?
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