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.

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.

Microeconomics A Contemporary Intro

10th Edition

ISBN:9781285635101

Author:MCEACHERN

Publisher:MCEACHERN

Chapter13: Capital, Interest, Entrepreneurship, And Corporate Finance

Section: Chapter Questions

Problem 13PAE

See similar textbooks

Related questions

Q: of oil would make 15 million barrels the optimal quantity to extract and sell

A: At price 90 oil would make 20 million barrels the optimal quantity to extract and sell this year.

Q: 5) A consumer has a fixed weekly budget (B) of $100 to spend on two goods (X and Y). Given unit…

A: “Since you have asked multiple questions, we will solve only one question for you i.e. question…

Q: Price (Dollars per gallon) 4.80 4.40 4.00 3.60 3.20 2.80 2.40 2.00 1.60 1.20 0.80 0.40 0 Quantity…

A: A monopolist is a business, firm or organisation that operates under a monopoly market. An entity is…

Q: 7.Birla Hoardings Ltd. is a new board company. They received an order of 6000 bill boards for a…

A: Cost is the amount which is incurred by the producer for the production , there are many types of…

Q: The Farley Farm, a dairy company, has total costs of $15,000 and total variable costs of $2,000. The…

A: Given: Total cost = $15000 Total variable cost = $2000

Q: Cars produced each day A specialty-car manufacturer has plants in Auburn, Biloxi, and Chattanooga.…

A: a) Calculating AB: AB = 1210044208912…

Q: Suppose the marginal product of labor for a firm is given by the figure found here:…

Q: Determine the revenue per year and revenue over the lifetime of the customer Number of smart devices…

A: Revenue is defined as the income of the company. The revenue generated is done from two sources…

Q: Instructions: Use the Mark Line tools to find the quantities demanded and supplied at the $7 minimum…

A: Minimum wages refers to the minimum legal remuneration that an employer must pay the workers during…

Q: Is due a full commission from the seller

A: Jenny put in a full offer on a property, which was accepted, and decided after 3 days to cancel the…

Q: Calculated % of annual average daily demand using Eq. (1) =180(30)-0.10 =128 ??? (solve) ??? (solve)…

A: Annual Average Daily Demand (AADD) refers to the average amount of a particular resource, such as…

Q: Define the term Expenses?

A: The term expense (expenditure) is defined as the cost incurred for something. In other words, it is…

Q: On the following graph, use the green point (triangle symbol) to plot the annual total revenue when…

A: The concept of price elasticity of demand (PED) quantifies the degree to which consumers react to…

Q: Exercise 7.3 An insurer issues a whole life insurance with sum insured $500 000, with premiums…

A: Net premium is defined as the insurance premium that includes he amount that is needed for the…

Q: how did you get 30.205?

A: Consumption in first period:q1=15.385Consumption in next period:q2=15.205

Q: Businesses that offer repayment plans for purchases are required by law to disclose the interest…

A: Given : Area of the space = 312 sq foot. Rate of carpet = 1.36 dollars per sq foot. Tax rate = 6.9%.…

Question

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.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1: Define budget constraint

VIEW

Step 2: Calculate Budget constraint

VIEW

Solution

VIEW

Step by step

Solved in 3 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions

Please provide answer in 1 hr
You are thinking of investing $3600 this year. You have received advice from family members. • Aunt Anne recommends investing in the stock market with a 9.45% average rate of return. • Uncle Rick recommends investing in a 5.60% certificate of deposit (CD). • Grandpa recommends investing in a 0.53% savings account. How much money will you have at the end of 10 years if you pick Aunt Anne's advice? money after 10 years: S How much money will you have at the end of 20 years if you pick Uncle Rick's advice? money after 20 years: $ How much money will you have at the end of 40 years if you pick Grandpa's advice? money after 40 years: $
4 please Help me with the answer. the one i have is wrong
Suppose you purchase a $10,000 face value zero-coupon bond and hold it to maturity, a term of 10 years. You paid $8,072 for the bond. A) What was your expected yield to maturity? B) What was your actual rate of return? % Enter answers as percents and round to 2 decimal places.
You are considering taking out a two-year loan of$1,000 from a bank, on which you can pay eithercompound yearly interest of 1 percent or a flat rateof 2 percent for the whole two-year period. Whichoption is a better deal, and why?
INTEREST THEORY PLEASE ASWER WITOUT EXCEL
Solve it correctly nd not use of the excel
Suppose that you purchase a 2 year coupon bond at the time it is issued for $1100. The face value of the bond is $1000, with annual coupon payments of $80. a. What is the bond’s “coupon rate”? b. What is the bond’s “current yield”? c. What is the bond’s (nominal) “yield to maturity”? d. If you hold the bond for 1 year and sell it for $1035 (after collecting the first coupon payment), what is your “holding period rate of return”? Please answer all part otherwise Dounvote
.An investor invests $2,600 in a company at a steady annual interest yield of 4.99 percent. She earns $390 profit in year 1, earns $467 profit in year 2, and earns $285 profit in year 3. Find the Present Value of this investment asset flow.
Annuity Suppose that you are thinking of buying a car that yields a rental of $5,000 each year for 3 years and then can be sold for scrap value of $8,000. With an interest rate of 10 percent, how much would we be willing to pay?
Bond A pays $8,000 in 20 years. Bond B pays $8,000in 40 years. (To keep things simple, assume that theseare zero-coupon bonds, meaning the $8,000 is theonly payment the bondholder receives.)a. If the interest rate is 3.5 percent, what is the valueof each bond today? Which bond is worth more?Why? (Hint: You can use a calculator, but the ruleof 70 should make the calculation easy.)b. If the interest rate increases to 7 percent, what isthe value of each bond? Which bond has a largerpercentage change in value?c. Based on the example above, complete the twoblanks in this sentence: “The value of a bond[rises/falls] when the interest rate increases,and bonds with a longer time to maturity are[more/less] sensitive to changes in the interestrate.”
T3