Question: 2. An investor has preferences represented by a utility function u(c) and initial wealth w > 0. Consider an asset that pays G with probability

2. An investor has preferences represented by a utility function u(c) and initial wealth w > 0. Consider an asset that pays G with probability and B with probability 1 .

a) Suppose the investor owns this asset. What is the minimum price he would sell it for?

b) Suppose he does not own it. What is the maximum price he would be willing to pay to buy it?

c) Explain why (or under which conditions) the buy and sell prices you have found are or are not the same.

d) Suppose w = 10, G = 10, B = 5 and u(c) = c. Compute the buy and sell prices.

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