Consider an economy with one good r and two agents i {1,2} with utility functions...

 

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Consider an economy with one good r and two agents i € {1,2} with utility functions u(x) = ln(x₁). There are two equally prob- able states, 8 € {L, H}. There are also two firms: firm 1 produces 1 unit in both of the states, whereas firm 2 produces 0 units in state L and 2 units in state H. Agent 1 owns initially the whole firm 1, while agent 2 owns initially firm 2. However, the agents can trade the firm shares with each other before the state is realized. The agents have no other endowment. (a) Compute the equilibrium shareholdings and the market values of the two firms (relative to each other). (b) Suppose there is also state 3, in which firm 1 produces 2 units and firm 2 produces 3 units. Create a call option on one of the firm shares, and use the firm shares and the call option to create an asset portfolio that returns 1 unit in any of the three states. Consider an economy with one good r and two agents i € {1,2} with utility functions u(x) = ln(x₁). There are two equally prob- able states, 8 € {L, H}. There are also two firms: firm 1 produces 1 unit in both of the states, whereas firm 2 produces 0 units in state L and 2 units in state H. Agent 1 owns initially the whole firm 1, while agent 2 owns initially firm 2. However, the agents can trade the firm shares with each other before the state is realized. The agents have no other endowment. (a) Compute the equilibrium shareholdings and the market values of the two firms (relative to each other). (b) Suppose there is also state 3, in which firm 1 produces 2 units and firm 2 produces 3 units. Create a call option on one of the firm shares, and use the firm shares and the call option to create an asset portfolio that returns 1 unit in any of the three states.

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Consider an economy with one good r and two agents i 12 with utility functions Uixi Inxi There are two equally probable states s L H There are also tw... View the full answer