Question: Question 1 (12 points) Uncertainty with Risk Neutrality Consider a two-country, two-period, two-state Arrow Debreu endowment economy. Suppose that the utility at home and abroad

Question 1 (12 points) Uncertainty with Risk Neutrality Consider a two-country,

Question 1 (12 points) Uncertainty with Risk Neutrality Consider a two-country, two-period, two-state Arrow Debreu endowment economy. Suppose that the utility at home and abroad is given by: U = In (Ci) + bc} + (1 7)bcz + so that countries are risk-neutral with respect to the second-period endowment. (a) Determine the Arrow-Debreu prices pH and p? for this world economy. Are they actuarially fair? (b) Obtain the equilibrium Home and Foreign consumption levels in both periods, and determine the endogenous interest rate 1+r. Question 1 (12 points) Uncertainty with Risk Neutrality Consider a two-country, two-period, two-state Arrow Debreu endowment economy. Suppose that the utility at home and abroad is given by: U = In (Ci) + bc} + (1 7)bcz + so that countries are risk-neutral with respect to the second-period endowment. (a) Determine the Arrow-Debreu prices pH and p? for this world economy. Are they actuarially fair? (b) Obtain the equilibrium Home and Foreign consumption levels in both periods, and determine the endogenous interest rate 1+r

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