Multiple Choice

1. Compare two economies, both with uncertainty about the realization of the state in the second period (H or L) and no utility from consumption in the first period. These economies have the same e1, eL, eH. If the choice of how much to buy of the assets that pay in H and L are different in the two economies, what can we say about these economies? A. they must have the same probability that each state occurs B. they must have different probabilities that each state occurs if taxes and transfers are zero in both states C. they must have different probabilities that each state occurs regardless of taxes and transfers

Let the probability states A and B occur in the next period be A = 0.8 and B = 0.2. If the government gives a transfer of 5 in state A, what is the size of the transfer in state B that satisfy budget balance? 1. 1 2. 5 3. 20 4. 8