3. Consider an exchange economy where a representative agent maximizes E0t=0tu(ct,ct1) subject to ct+qtat+1(qt+dt)at,t=0,1, where ct is consumption in date t and at+1 is number of assets the agent holds at the beginning of period t+1. qt denotes the asset price in period t, and dt denotes the dividend paid to asset holders during t. Assuming that u(ct,ct1)=ln(ctct1). a) Find the coefficient of relative risk aversion and the elasticity of intertemporal substitution. "inancial Theory page 2 b) Set up the Lagrangian and find the first-order conditions. c) Explain why ct=dt in equilibrium. d) Find the Euler equation and the equilibrium asset pricing equation. e) Define the rate of return on this risky asset and show the law of one price equation f) Let's introduce risk-free asset into this model, show the equation that determines the risk-free rate in equilibrium . g) According to this model, what are factors that can possibly account for the equity premium