4. (25 points) Consider a two-period economy. Suppose investors' prefer- ences for consumption at time t are represented by the following utility function: u(ct) = -1 = = = A Also, suppose the subjective discount factor is = 0.8. Suppose you know that, in equilibrium, Ct = 1 and Ec++1 = 1. a) Suppose Stock A earns a dividend 041 = {4+1 (and no more dividends in the future). Compute the price of this stock. b) Suppose there is another Stock B whose payoff is di } - {c+1. Is the price of this stock lower or higher than the price of Stock A? Give a careful explanation. c) Suppose there is a risk-free asset C whose payoff is x +1 3. Suppose it is currently priced in the market for 0.10. Do you think that this asset is fairly priced, underpriced or overpriced? What would you expect to happen in the market? d) Suppose that the agent preferences over consumption are represented by u(ct) = lnct rather than by uct) = -c?. How does your answer to question c change? = 4. (25 points) Consider a two-period economy. Suppose investors' prefer- ences for consumption at time t are represented by the following utility function: u(ct) = -1 = = = A Also, suppose the subjective discount factor is = 0.8. Suppose you know that, in equilibrium, Ct = 1 and Ec++1 = 1. a) Suppose Stock A earns a dividend 041 = {4+1 (and no more dividends in the future). Compute the price of this stock. b) Suppose there is another Stock B whose payoff is di } - {c+1. Is the price of this stock lower or higher than the price of Stock A? Give a careful explanation. c) Suppose there is a risk-free asset C whose payoff is x +1 3. Suppose it is currently priced in the market for 0.10. Do you think that this asset is fairly priced, underpriced or overpriced? What would you expect to happen in the market? d) Suppose that the agent preferences over consumption are represented by u(ct) = lnct rather than by uct) = -c?. How does your answer to question c change? =