Consider the two-period problem with income risk and quadratic preferences we studied in class. Assume that...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Consider the two-period problem with income risk and quadratic preferences we studied in class. Assume that there're more than two states of the world, s = 0, 1, ..., S, S > 2; assume also that 3(1+r) = 1 and Ao = 0. We have shown in class that consumption at time 0 will equal Co= 1 + r 2+r 3/0+ Eli!), 1+r where E[₁] = 7(0)₁ (0)+7(1)y₁ (1) +...+(S)y₁ (S). (a) Argue that consumption at time I will equal consumption at time 0 only in those states of the world in which y₁ (s) = E[y]; in other words, consumption at time 1 will equal consumption at time 0 only if expectations are fulfilled. (Hint: use the relation c₁(s) = y₁(s) +So(1+r) for any state s = 1, ..., S, and evaluate the formula for optimal saving for a state where y(s) = E[₁].) (b) Argue that consumption at time 1 will never equal consumption at time 0 if there're only two states of the world (S= 2) with distinct realizations of income, that is, y₁ (0) yn (1). Consider the two-period problem with income risk and quadratic preferences we studied in class. Assume that there're more than two states of the world, s = 0, 1, ..., S, S > 2; assume also that 3(1+r) = 1 and Ao = 0. We have shown in class that consumption at time 0 will equal Co= 1 + r 2+r 3/0+ Eli!), 1+r where E[₁] = 7(0)₁ (0)+7(1)y₁ (1) +...+(S)y₁ (S). (a) Argue that consumption at time I will equal consumption at time 0 only in those states of the world in which y₁ (s) = E[y]; in other words, consumption at time 1 will equal consumption at time 0 only if expectations are fulfilled. (Hint: use the relation c₁(s) = y₁(s) +So(1+r) for any state s = 1, ..., S, and evaluate the formula for optimal saving for a state where y(s) = E[₁].) (b) Argue that consumption at time 1 will never equal consumption at time 0 if there're only two states of the world (S= 2) with distinct realizations of income, that is, y₁ (0) yn (1).
Expert Answer:
Answer rating: 100% (QA)
The image contains a question about consumption under income risk with quadratic preferences The given formula for consumption at time 0 c0 is a funct... View the full answer
Related Book For
Posted Date:
Students also viewed these economics questions
-
(a) Determine the fundamental vibrational modes of BC13 (D3h) that are infrared and Raman active (10 marks) (b) Determine the atomic orbitals that Xe can use to form hybrid orbitals in XeF4 (D4h)...
-
The sp2 hybrid atomic orbitals have the following general form: where Ïs, Ïpx, and Ïpy represent orthonormal (normalized and orthogonalized) atomic orbitals. Calculate the values of A...
-
The following illustration shows the orbitals used to form the bonds in carbon dioxide. Each color represents a different orbital. Label each or-bital, draw the Lewis structure for carbon dioxide,...
-
A quality inspector selects a sample of 12 items at random from a collection of 60 items, of which 18 have excellent quality, 25 have good quality. 12 have poor quality, and 5 are defective. (a) What...
-
Leave the economy alone regardless of unemployment, jump in at every little spike in the unemployment rate, OR act only when there is a significant increase in the numbers? Explain your choice.
-
The formula shows the brightness of the light of an object, which varies inversely as the square of the distance. L, measured in lumens, is the brightness of the light and d, measured in meters, is...
-
Why is duration important?
-
Presented below is the SEC-mandated disclosure of contractual obligations provided by Deere & Company in a recent annual report. Deere & Company reported current assets of $27,208 and total current...
-
Defermine the dimensions of the spotted structural member as ' Q 1 " , which may be considered as a console bearn, using first. pniciples of "Strength of Mateniais" ( that is , \ sigma max < = \...
-
Using the SAS data set vitals, create two temporary SAS data sets called Subset_A and Subset_B. Include in both of these data sets a variable called Combined equal to .001 times WBC plus RBC....
-
A non-rotating torsion rod in shown in the diagram below must transmit a fluctuating amount of torque, the torque range is from 1000 Ibin to 19,500 lbin. The design is based on a design factor of 2.5...
-
You are considering opening a new plant. The plant will cost $95.8 million upfront. After that, it is expected to produce profits of $31.5 million at the end of every year. The cash flows are...
-
Diamantis Masoutis S.A. is considering the following 10-year projects. Comment on the acceptability of each project. Assume that the firm has a cost of capital of 5%. a. Initial investment is...
-
Amit Krishnamurthy invests in a bond that promises him $6,000 each year for the next 20 years. If he pays $75,000 for this investment, what is his annual rate of return?
-
Belle Fashions supplies garments to high street retailers. They have been paying dividends steadily for 10 years. During that time, dividends have grown at a compound annual rate of 5%. If Belle...
-
Consider two investment projects, both of which require an upfront investment of $12 million and pay a constant positive amount each year for the next 10 years. Under what conditions can you rank...
-
Uneven cash flows: An investment costs $465 and is expected to produce cash flows of $100 at the end of each of the next 4 years, then an extra lump sum payment of $200 at the end of the fourth year....
-
What are the key elements of a system investigation report?
-
The shape of a spectral line, J(w), is related to the free induction decay signal G(t) by where a is a constant and 'Re' means take the real part of what follows. Calculate the lineshape...
-
Show that the function xyz has symmetry species AI in the group D2.
-
The temperature dependence of the vapour pressure of solid sulfur dioxide can be approximately represented by the relation log (p/Torr) = 10.5916 - 1871.2/ (T/K) and that of liquid sulfur dioxide by...
-
Who was Phar-Mors flamboyant Chief Executive Officer?
-
Which of the following generally is not considered something of value? 1. Cash, money or checks 2. Airline miles or hotel credits associated with frequent activity (e.g., frequent flier miles) 3. An...
-
Which of the following is not one of the five major categories of fraudulent disbursements? 1. Payroll schemes 2. Expense reimbursement schemes 3. Shell company schemes 4. Billing schemes
Study smarter with the SolutionInn App