Consider a finance economy with two states with probabilities pi1=1/3 pi2=2/3. Both agents have utility of income v(w)=ln(w). Current consumption does not enter agents expected utilities; they are interested only in consumption tomorrow. The agents receive endowments of wealth tomorrow. In state 1 agent A will get 6 units of wealth, in state 2 he will receive 3 units. Agent B will get 6 units of wealth in both both/either state. - Compute the equilibrium prices of wealth, (Arrow security prices), and the equilibrium allocations of wealth for Agents A and B... Hint:you need to set up the optimisation problem for each agent, solve for the demands for contingent wealth, impose market clearing conditions and solve for the equilibrium prices of wealth in different states (or their ratio).
Consider a finance economy with two states with probabilities pi1=1/3 pi2=2/3. Both agents have utility of income v(w)=ln(w). Current consumption does not enter agents expected utilities; they are interested only in consumption tomorrow. The agents receive endowments of wealth tomorrow. In state 1 agent A will get 6 units of wealth, in state 2 he will receive 3 units. Agent B will get 6 units of wealth in both both/either state. - Compute the equilibrium prices of wealth, (Arrow security prices), and the equilibrium allocations of wealth for Agents A and B... Hint:you need to set up the optimisation problem for each agent, solve for the demands for contingent wealth, impose market clearing conditions and solve for the equilibrium prices of wealth in different states (or their ratio).
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Consider a finance economy with two states with probabilities pi1=1/3 pi2=2/3. Both agents have utility of income v(w)=ln(w). Current consumption does not enter agents expected utilities; they are interested only in consumption tomorrow. The agents receive endowments of wealth tomorrow. In state
1 agent A will get 6 units of wealth, in state
2 he will receive
3 units. Agent B will get 6 units of wealth in both both/either state.
- Compute the equilibrium prices of wealth, (Arrow security prices), and the equilibrium allocations of wealth for Agents A and B... Hint:you need to set up the optimisation problem for each agent, solve for the demands for contingent wealth, impose market clearing conditions and solve for the equilibrium prices of wealth in different states (or their ratio).
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