Answer the following questions given below in economics ..follow the instructions given out

1. Consider an economy with three assets whose value depends on the state of the economy, s E {l, r} . The assets are f, g and c with payoffs c(l) = c(r) = $2. f(1) = g(r) = $5, and f(r) = g(1) = $1. Agents have monotonic preferences over money, and are risk neutral, that is given a prior 7 on {l, r} they evaluate any asset by its expected monetary value. However, agents are unsure about the true prior, and consider any prior with 7(1) > 1/10 and 7(r) > 1/10 possible. Let II := {TEA ({l, r}) |7(1) > 1/10 and 7(r) > 1/10} be the set of priors they consider. Agents are ambiguity averse and evaluate their exposure to uncertainty by the worst prior in II, V(h) = min [(r)h(r) + (1)h(1)] for any portfolio h = _ ai where a; 2 0 for all i. ie{c,f,g} (a) (3 points) If individuals are endowed with money, for which price p(f) of asset f will agents be willing to buy it? And for which p(g) will they buy asset g? (b) (10 points) Now consider instead an exchange economy with three indivudals, where each is endowed with a divisible unit of one of the assets: A owns a unit of f, B owns a unit of g, and C owns a unit of c. The three individuals can trade their assets prior to the realization of the state. It is natural to normalize the price p(c) of c to be $2 and to define prices for the other assets relative to that price. Find necessary and sufficient conditions on prices and equilibrium transfers of assets between individuals so that markets clear in this exchange economy. (This one is not easy. Carefully think about what combination of prices and asset purchases could possibly constitute an equilibrium.) (c) (6 points) Compare your findings in (b) to those in (a) and explain how they can both be true at the same time. Is there risk sharing in equilibrium? Why? Make sure your answer reflects the fact that individuals are risk neutral for a given prior. For markets to clear you must find prices at which each individual is buying the most preferred portfolio of assets they can afford given the value of their endowment, and where aggregate consumption exactly equals aggregate endowment