Question A.3 (iv) Consider an economy with a single physical commodity and uncertainty captured by two states of nature S = {a,b}. This economy is endowed with markets for two assets with payoffs r] = [1 2] and r = [2 0] in states a and b respectively. There are on aggregate ten units of the commodity available in each state of nature. The economy is populated by two individuals h, k. Individual h has preferences Un (xħ(a), xħ(b)) = log äħ(a) + log ¤ħ (b). At equilibrium, x₁(a) 6 while x(b) = 2xk(a). Find equilibrium asset prices and allocation of the commodity in each state. =

Question A.3 (iv) Consider an economy with a single physical commodity and uncertainty captured by two states of nature S = {a,b}. This economy is endowed with markets for two assets with payoffs r] = [1 2] and r = [2 0] in states a and b respectively. There are on aggregate ten units of the commodity available in each state of nature. The economy is populated by two individuals h, k. Individual h has preferences Un (xħ(a), xħ(b)) = log äħ(a) + log ¤ħ (b). At equilibrium, x₁(a) 6 while x(b) = 2xk(a). Find equilibrium asset prices and allocation of the commodity in each state. =

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter13: General Equilibrium And Welfare

Section: Chapter Questions

Problem 13.4P

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In the United States, one of the largest welfare programs is the Supplemental NutritionAssistance Program (SNAP)1representing the second largest in-kind transfer programfor individuals in the US. From the abstract of the study we are told “[a] 1% increasein benefits per population raises grocery prices by a persistent 0.08%. A calibratedpartial-equilibrium model implies a marginal benefit dollar raises a recipient’s consumersurplus from groceries by $0.7, producer surplus by $0.5, and lowers each non-SNAPconsumer’s surplus by $0.05.” In other words, increasing the size of the in-kind transferleads to higher prices. This higher price results in a larger surplus for grocery stores anda lower consumer surplus for individuals not participating in SNAP. Those individualswho participate in SNAP can increase their overall consumer surplus as they haveaccess to more goods, despite the higher price. This result is estimated using thenearly 100% redemption of the SNAP benefits (i.e. assuming the…
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Consider two individuals, Fred and Barney. In one hour, Fred can produceeither 15 gallons of beer, or 3 gallons of wine. In one hour, Barney can produce2 gallons of beer or 4 gallons of wine. Assume both goods can be produced incontinuous quantities. Assume that each person wants to consume 3 gallons of wine, then as muchbeer as they can. Determine what each person will end up consumingi) when they cannot trade.ii) when they can trade at a price of 1gallon wine = 2 gallons beer.Use this to explain why trade benefits both consumers.
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Figure 1 The production possibility frontier ABCDE is a production possibility frontier. It shows the different combinations of goods which can be produced if all resources are fully and efficiently utilised. The economy can produce at any point on the line. It cannot produce at G because the PPF shows the maximum that can be produced. It can produce within the PPF,05 such as at F, but less will be produced than the maximum possible. Non-manufactured goods 50 40 30 20 10 0 A 10 B Ti C 20 30 Manufactured goods G D E 40
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