Consider an economy, where there is a single consumption good and two states of nature {a,b}....

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Consider an economy, where there is a single consumption good and two states of nature {a,b}. There are two consumers, A and B, with preferences and (random) endowments as follows: • Agent A: uA (x₁(a), x₁(b)) = logx₁(a) + logx₁(b), (еÂ(a), еÂ(b)) = (1, 2) • Agent B: uB(2B(a),£B(b)) = logxB(a) +logxB(b), (eB(a), eB(b)) =(3,1) (i) In order to hedge against risk individuals can trade two securities with returns - (1), - (i), where the top payoff refers to state a and the bottom to state b. How many units of the asset r₁ will be held by individual A at equilibrium? denominated in units of the commodity: r₁ = and r2 Consider an economy, where there is a single consumption good and two states of nature {a,b}. There are two consumers, A and B, with preferences and (random) endowments as follows: • Agent A: uA (x₁(a), x₁(b)) = logx₁(a) + logx₁(b), (еÂ(a), еÂ(b)) = (1, 2) • Agent B: uB(2B(a),£B(b)) = logxB(a) +logxB(b), (eB(a), eB(b)) =(3,1) (i) In order to hedge against risk individuals can trade two securities with returns - (1), - (i), where the top payoff refers to state a and the bottom to state b. How many units of the asset r₁ will be held by individual A at equilibrium? denominated in units of the commodity: r₁ = and r2

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Lets first calculate the endowment of A in the two states of nature eAa 1 eAb ... View the full answer