5 Choice Under Uncertainty The economy tomorrow will be in one of two states G (good) or 13 {bad}. 0 The state C will occur with probability CI. 0 The state B will occur with probability [1 a}. where D -:: or cf 11 All agents can hold their wealth today in only two kinds of assets, g and bi o A unit of asset 3 will yield one unit of consumption tomorrow if the economy is in state C, nothing if the state is B. 0 Similarly, a unit of asset b will yield one unit of consumption tomorrow the economy is in state B, nothing if the state is G. Asset g and h can be bought and sold today at prices pig and pb respectiver An agent has a yonNeunlann Morgestern utility function: 13(6) = J5 where C denotes the level of consumption. 1. Suppose that the agent holds 19 units of asset g and 1;, units of asset h. Write down the expected utility, Eu. (:9, $5). '2' Suppose that the agent's wealth today is m, and she curr-tly holds no asset of either kind. What is the budget constraint which she must observe in her decision to buy asset I; and Is? 3. Find her demand (optimal I, and 11,} for the two assets when m = 4, o = %, pg 2 21 pg. 2 2