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4. Consider a two-period economy. The consumer maximizes ln(c1) + E1 ln(c2). They have an initial endowment of w1. At time 1, they can invest
4. Consider a two-period economy. The consumer maximizes ln(c1) + E1 ln(c2). They have an initial endowment of w1. At time 1, they can invest in a risk-free bond with gross return Rf and in a risky asset with a price p1 and payoff v at time 2.
a) Write down the first order conditions for the price of the risky asset, p1, and the gross return of the risk free-asset, Rf .
b) Suppose that the supply of the risky asset is a1 = 1 and the risk-free bond is b1 = 0. What happens to p1 and Rf when w1 increases? Explain
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