Question 2 [24 points] Consider the following economy. Agent B owns w=100 at =0 but wants to consume at t=1. In order to store his wealth, agent B wants to buy a security from agent A who owns an asset X that is used as collateral to backed the security. The payottf x of the asset 1s uniformly distributed between [ 100, 200] and realizes at t=2. Note, f(x)=1/100. Agent A is willing to sell the security 1f the price 1s equal expected payoft of the security. a) Suppose agent B buys equity from agent A. What is the fraction Bx that agent B can buy for a price of 100? [2 Points] b) Suppose agent B buys a bond from agent A. What 1s the face value D of the bond that agent B can buy for a price of 100? [3 Points] At t=1, agent B wants to consume and sells a security to agent C who owns w=100. Suppose agent C can learn about x by paying the information cost y=3. If agent C does not acquire information, he is willing to buy the security for a price equals expected payoft. Suppose there 1s no new public information at t=1 and x 1s still between [100, 200]. ) Agent B owns equity. How much can he consume at t=1 by trading with agent C such that agent C buys with probability 1?7 [3 Points] d) What is agent B exactly selling to agent C? Provide a verbal description as well as a mathematical answer. It 1s enough to set up the formula. [4 Points] e) Agent B owns the bond. How much can he consume at t=1 by trading with agent C such that agent C buys with probability 1? [2 Points] f) Compare the amount agent B can consume in (c) and () and provide a graphical intuition for the result. [3 Points] For the remaining questions, it 1s assumed that agent B owns the bond with face value D as in question (b). This face value 1s fixed. At t=1 there 1s a change 1n macroeconomic conditions and x 1s uniformly distributed between [0,100]. 2) What 1s the price of the bond at t=1? [2 Points] h) How much can agent B consume at t=1 by trading with agent C such that agent C buys with probability 1?7 [3 Points] 1) In question (h) what is agent B exactly selling to agent C? A verbal description is enough. [2 Points]