Paul and George will both have the same utility function: U(I) = I^1/2. Their subjective probabilities for the two states of the world and their income endowments are in the table.

1. Assume that A-D security prices are initially given by q₁= $6 an q₂= $4. From Paul's perspective, are these prices actuarially fair? (Yes, No, There is not information to answer).

Because of this, we will expect Paul's expected utility-maximizing choice of income in state 1to be (greater than, less then, the same as)his expected utility-maximizing choice of income in state 2.

2. Solve for Paul's expected utility-maximizing choice of z₁and z₂given all the information presented in the quiz so far. The optimal level of z₁= ____, and the optimal level of z₂= ____.

After trading in the A-D security market, Paul's income in state 1 will be I₁=____and his income in state 2 will be I₂=____.