Suppose that with some probability there can be a pandemic next year. If there is a pandemic next year, then the consumption will be c(p) . If there is no pandemic then the consumption will be c(n) . We know that c(p) < c(n) . The consumption level today is c0 . a) [10 points] Consider two assets. Let x be the payment of the first asset and y be the payment of the second asset. The payment structure is x(p)=10 , x(n)=0 , y(p)=0 and y(n)=10 . Which one will have a higher price? Why? Explain. You don't need to calculate anything. b) [10 points] Suppose that price of the first asset is Px = 10 and the price of the second asset is Py = 2 . Consider a third asset that pays z(p) = 3 and z(n) = 6 . Using the consumption-based asset pricing model, show that the price of this asset is Pz = 4.2

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a The payment structure of the first asset implies that it pays 10 in the event of a pandemic xp 10 ... View the full answer