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:
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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