1) Consider a a two state model. Suppose that there are two consumers, A and B, with

endowments of A = (6, 4) and B = (8, 6).

Let the objective probability of state 1 occurring be . Suppose that both consumers are

expected utility maximizers and strictly risk averse and that they have identical preferences u(c1) + (1 )u(c2) with u() > 0, and u() < 0.

1. Is there idiosyncratic risk? Is there aggregate risk? Demonstrate/explain.
2. I claim that neither consumer will be fully insured in the Walrasian equilibrium of this economy. Prove this claim.
3. What (if anything) can we say about the Walrasian Equilibrium price ratio in this economy?