Suppose there are only two period, this and next year. There are two states of the economy in the next year: good state and bad state, each happening with probability 0.5. Amy has a stable job and her income is constant at 500 unit of money across both states. Amy currently has an initial wealth of 2000 available for investing either in stock or in bond. Each unit of the stock, selling at a price of 1.3 now, pays off 2 (unit of money) in the good state and 1 (unit of money) in the bad state. The bond, on the other hand, guarantees an interest rate of 5 percent next year (regardless of states). Assume next year is the last relevant period, so consumption coincides with wealth in either state. (a) Suppose Amy does not face short-sale constraint. Describe, in terms of state-wealth, the budget set facing Amy.

Suppose there are only two period, this and next year. There are two states of the economy in the next year: good state and bad state, each happening with probability 0.5. Amy has a stable job and her income is constant at 500 unit of money across both states. Amy currently has an initial wealth of 2000 available for investing either in stock or in bond. Each unit of the stock, selling at a price of 1.3 now, pays off 2 (unit of money) in the good state and 1 (unit of money) in the bad state. The bond, on the other hand, guarantees an interest rate of 5 percent next year (regardless of states). Assume next year is the last relevant period, so consumption coincides with wealth in either state. (a) Suppose Amy does not face short-sale constraint. Describe, in terms of state-wealth, the budget set facing Amy.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

Given the time value of money, is it ethical not to pay interest? How does the amount or duration of the loan matter?
Solve it now. Not copy paste answer provided
What is the AVC and MC?
Define markup amount.
What about calculating 2-6?
What is the unit contribution margin?
Please find the value of a APS when APC is 0.44
Please no written by hand solution Keiko is saving money to buy a bike. She has $52 and is going to save an additional $8 each week. The bike costs $164. In how many weeks will she have enough money to buy the bike?
Isocost line and least-cost combination
what is Operational definition Repeat Purchase for food customer?
Liz immigrated to Canada at age 33. By age 65, she will have lived in Canada for 32 years. Calculate her OAS