Q2. (Ambiguity and Trade) People do not participate in the stock market to the extent that standard theory implies. In this probl- you are asked to show that this can be explained by ambiguity aversion. Suppose the state space is S = {31,32}. There is an asset that pays $1 in state 51 and 0 otherwise. The price of the asset is 3!) > 0. The agent can choose not to enter the asset market, in which case she pays 0 and gets 0. Alternatively, she can enter the market and buy the asset, in which case she pays price b and the receiver; the outcome of the asset depending on the state. The nal possibility is that she can enter the market and sell the asset short, in which case she receives b but then must pay the outcome of the asset depending on the state. Consider an SEU with belief p and a (linear) utility function where u(:r) = :1: for any outcome as. (a) Compute the SEU for each of the three acts dened above. Show that, whatever the price I), the agent will want to enter the market. (b) Suppose now that the agent is a Maxmin EU agent and her set of priors admits two possible priors, p and q, where p(sl) = (1(32)