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,

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?

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