Consider a single consumption good and two states of nature {a, b}. An investor haspreferences and a (random) endowment of this commodity as follows:• u (x(a), x(b)) = logx(a) + logx(b), (e(a), e(b)) = (0, 2)In order to hedge against risk this investor can trade two securities with returns(1).denominated in units of the commodity: rị =trading at a price q1 = 3 perunit and r2 =C), tradingat a price= 4 per unit. Answer:q2Find the optimal consumption plan of this investor and answer:If instead of asset markets this investor faced contingent markets, for what (rela-tive) contingent market prices P would this investor choose THE SAME optimalconsumption plan?p(b)

Consider a single consumption good and two states of nature {a, b}. An investor has preferences and a (random) endowment of this commodity as follows: ● u (x(a), x(b)) = logx(a) + logx(b), (e(a), e(b)) = (0, 2) In order to hedge against risk this investor can trade two securities with returns = - 3 per denominated in units of the commodity: r₁ = = (1), trading at a price 9₁ (2), trading at a price 92 Find the optimal consumption plan of this investor and answer: If instead of asset markets this investor faced contingent markets, for what (rela- tive) contingent market prices (a) would this investor choose THE SAME optimal consumption plan? p(b) unit and r2 = = 4 per unit. Answer:

Consider a single consumption good and two states of nature {a, b}. An investor has preferences and a (random) endowment of this commodity as follows: ● u (x(a), x(b)) = logx(a) + logx(b), (e(a), e(b)) = (0, 2) In order to hedge against risk this investor can trade two securities with returns = - 3 per denominated in units of the commodity: r₁ = = (1), trading at a price 9₁ (2), trading at a price 92 Find the optimal consumption plan of this investor and answer: If instead of asset markets this investor faced contingent markets, for what (rela- tive) contingent market prices (a) would this investor choose THE SAME optimal consumption plan? p(b) unit and r2 = = 4 per unit. Answer:

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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