Consider a a two state model. Suppose that there are two consumers, A and B, with endowments of wA = (4, 6) and wB = (6,8). Let the objective probability of state 1 occuring be T. Suppose that both consumers are expected utility maximizers and strictly risk averse and that they have identical preferences TU(C1)+ (1 – 7)u(c2) with u'(-) > 0, and u"(·) < 0. | 1. Is there ideosyncratic risk? Is there aggregate risk? Demonstrate/explain. 2. I claim that neither consumer will be fully insured in the Walrasian equilibrium of this economy. Prove this claim. 3. What (if anything) can we say about the Walrasian Equilibrium price ratio in this economy?
Consider a a two state model. Suppose that there are two consumers, A and B, with endowments of wA = (4, 6) and wB = (6,8). Let the objective probability of state 1 occuring be T. Suppose that both consumers are expected utility maximizers and strictly risk averse and that they have identical preferences TU(C1)+ (1 – 7)u(c2) with u'(-) > 0, and u"(·) < 0. | 1. Is there ideosyncratic risk? Is there aggregate risk? Demonstrate/explain. 2. I claim that neither consumer will be fully insured in the Walrasian equilibrium of this economy. Prove this claim. 3. What (if anything) can we say about the Walrasian Equilibrium price ratio in this economy?
Chapter1: Making Economics Decisions
Section: Chapter Questions
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Transcribed Image Text:Consider a a two state model. Suppose that there are two consumers, A and B, with
endowments of wA = (4, 6) and wB = (6,8).
Let the objective probability of state 1 occuring be r. Suppose that both consumers are
expected utility maximizers and strictly risk averse and that they have identical preferences
TU(C1)+ (1 – 1)u(c2) with u'(-) > 0, and u"(·) < 0.
1. Is there ideosyncratic risk? Is there aggregate risk? Demonstrate/explain.
2. I claim that neither consumer will be fully insured in the Walrasian equilibrium of this
economy. Prove this claim.
3. What (if anything) can we say about the Walrasian Equilibrium price ratio in this
economy?
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