Suppose that there are only two possible future states of the world, and the utility function is logarithmic 20 Let the probability of state 1, equal 2 3, and the prices of the pure securities, p1 and p2, equal $0 60 and $0 40, respectively An individual has an initial wealth or endowment, W0, of $...

We to solve Maxlog C 23 log Q 1 13 log Q 2 Subject to C 6Q 1 4Q 2 50000 We can solve for C in 42 and ...

Suppose that there are only two possible future states of the world, and the utility function is

Question:

Suppose that there are only two possible future states of the world, and the utility function is logarithmic.20 Let the probability of state 1, π equal 2/3, and the prices of the pure securities, p1 and p2, equal $0.60 and $0.40, respectively. An individual has an initial wealth or endowment, W0, of $50,000.
(a) What amounts will the risk-averse individual invest in pure securities 1 and 2?
(b) How will the individual divide his or her initial endowment between current and future consumption?