points The consumer has a utility function given by U(C)=In(C). Her subjective discount factor is given...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
points The consumer has a utility function given by U(C)=In(C). Her subjective discount factor is given by 0.8. There are two states of the world next period. Given contingent claim prices the individual chooses a level of consumption Co today and 16 in state 1 and 17 in state 2. Using this information (a) Calculate the value of the stochastic discount factor (SDF) in each state in terms of Co (8 marks). (b) How do the prices of contingent claims in the two states change in response to Co and discuss the intuition for this relationship (10 Marks) (c) Suppose that the individual gets a tax rebate in the current period. Explain how she would change her decision if she wishes to maximise utility. (7 marks) points The consumer has a utility function given by U(C)=In(C). Her subjective discount factor is given by 0.8. There are two states of the world next period. Given contingent claim prices the individual chooses a level of consumption Co today and 16 in state 1 and 17 in state 2. Using this information (a) Calculate the value of the stochastic discount factor (SDF) in each state in terms of Co (8 marks). (b) How do the prices of contingent claims in the two states change in response to Co and discuss the intuition for this relationship (10 Marks) (c) Suppose that the individual gets a tax rebate in the current period. Explain how she would change her decision if she wishes to maximise utility. (7 marks)
Expert Answer:
Answer rating: 100% (QA)
a To calculate the stochastic discount factor SDF in each state we can use the formula SDF uC1 p1 uC... View the full answer
Related Book For
Posted Date:
Students also viewed these economics questions
-
Suppose a person has a utility function given by U = [x + y]1/ where is a number between - and 1. This is called a constant elasticity of substitution (CES) utility function. You will encounter CES...
-
In an economy there are two states of the world and four assets. You are given the following prices for three of these securities in different states of the world: "Current" prices for A, B, C are...
-
Mike has a utility function given by U = 10*min{2 C , M }, where C is cereal and M is milk. Cereal costs 4 per unit and milk costs 6 per unit. If Mike has income of 800, what is the maximize utility...
-
Carl contributes equipment with a $50,000 adjusted basis and an $80,000 FMV to Cook Corporation for 50 of its 100 shares of stock. His son, Carl Jr., contributes $20,000 cash for the remaining 50...
-
EKC Company uses the retail inventory method. The following information for 2016 is available: Required: Compute the cost of the ending inventors under each of the following cost flow assumptions...
-
Two hikers are standing 10 m apart and are holding the ends of a 12-m length of rope as shown. Knowing that the mass per unit length of the rope is 0.07 kg/m, determine (a) The sag h, (b) The...
-
Why is duration important?
-
John Wills, Bates & Hill Fabricators' budget director, has received budget information from several managers (see Exercises 5-8, 9, 11, 15, 17, 19, 20, 23, and 25) and is preparing the company's cash...
-
16. Let a1, a2, 17. a <0 is: (a) 22 be in H.P. with a = 5 and a20 = 25. The least positive integer n for which " (b) 23 Sum of the series rlog. r=1 (c) 24 (d) 25 r+1 + is: r
-
The steam cycle of a marine nuclear propulsion plant may be modeled as an ideal Rankine cycle. a . Using the information provided below determine the enthalpy of the working substance in each state....
-
On December 15, Jay Cleaning Co. agreed to provide Kay Co. with bimonthly cleaning services for its offices. The services will be billed to Kay Co. on the fifteenth of each month at a rate of $400....
-
Existential Reflections: According to Stuart Greenstreet, writing in Philosophy Now , 2016: "No objective account of my properties could ever describe my subjective experience of what it's like to be...
-
Chadron Industries is currently operating at full-capacity sales. Thus, sales are currently being limited by the firm's: A. long-term debt. B. fixed assets. C. inventory. D. net working capital. E....
-
1. Record the remaining May transactions in the sales journal, cash receipts journal, purchases journal, cash payments journal, and general journal. 2. Post the individual amounts from the five...
-
The state of Rhode Island requires that all contractors must be licensed for any residential work to be done. Barrington General Contractors was hired to build an addition to a home that the Leighton...
-
Analyse the licensee-in-charge legislative responsibilities, under the Property and Stock Agent Act 2002 (NSW) , regarding trust account audits in the following table. (URL:...
-
Which of the following statements is correct as regards milling? aIt can not be used on old machines due to backlash between the feed screw of the table and the nut. bThe chips are disposed of easily...
-
Consider a game of poker being played with a standard 52-card deck (four suits, each of which has 13 different denominations of cards). At a certain point in the game, six cards have been exposed. Of...
-
You decide to start a business that provides computer consulting advice for students in your residence hall. What would be an example of an explicit cost you would incur in operating this business?...
-
What is the difference between average product and marginal product? Can you sketch a total product function such that the average and marginal product functions coincide with each other?
-
Consider the congestion pricing problem illustrated in Figure 17.5. a) What is the size of the deadweight loss from the negative externalities if there is no toll imposed during the peak period? b)...
-
Equity balances for Sen Widyaya appearing in the statement of financial positions of Widyayas Window Washing Services as at 30 June 2024, 2023 and 2022 are set out below. During 20222023, Sen...
-
A friend who has established a new Pilates studio, Core Strength, has asked you to give some advice as to the contents of financial statements. Transactions of Core Strength include: (a) contribution...
-
Month-end statement of financial position amounts for the practice of David Wei, an immigration lawyer, for 3 consecutive years are shown below. The information is complete except for the balance in...
Study smarter with the SolutionInn App