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IV. There are two dates, 1 and 2. There is a market for real bonds at date 1. One unit of bonds pays one
IV. There are two dates, 1 and 2. There is a market for real bonds at date 1. One unit of bonds pays one unit of goods at date 2 without any risk. 1 The supply of bonds is determined by a simple relationship s = 10p, where s is the supply and p is the price of bonds. In the demand side, there is a unique buyer of bonds. The buyer owns 10 units of goods at date 1. At date 2 the buyer needs to pay a tax (to the government) at the rate 10% for the interest he earns from his investment on bonds. Independent of his date- 2 tax payment (and his date-1 investment), at date 2 the buyer faces two states that occur with equal probability: he receives one unit of goods (from the government) at state 1 and two units of goods at state 2. If the buyer consumes c at date 1 and 2 at date 2, his utility U(c1, c2) = Inc + Inc. Derive the equilibrium price p.
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