Consider an economy with two periods, t = 0 and t = 1, and three states: bad, normal, and good. Three assets, Asset A, B, and C, are traded: Their payostructures are listed as follows: Payo of State Payo of Payo of Asset A at t = 1 Asset B at t = 1 Asset C at t =1 bad 1 0 0 normal 1 1 0 good 1 1 1 Price at t = 0 0:95 0:55 (a) Compute all the state prices. (b) Catherine, a typical investor, has 0:25 a time-discount factor = 0:9; a von-Neumann-Morgenstern utility function of u(c) = lnc; an endowment of 3800 at t = 0, and zero income in all states at t = 1. After deliberation, she decides to hold the following portfolio: Asset A Asset B Asset C Position 1300 900 280 The uninvested portion of the endowment is consumed in period t = 0. Use the informa tion above to determine the Catherine s belief about the probabilities of the states. (Hint: Formulate her choice problem as one of choosing a consumption plan for all date-state com binations.) (c) Breaking news reveals that the bad state is not as horrible