Question 2. Bank Run. Consider the Diamond-Dybvig model we discussed in class. Suppose marginal utility of consuming c is given by c-2. Gross interest rate
Question 2. Bank Run. Consider the Diamond-Dybvig model we discussed in class. Suppose marginal utility of consuming c is given by c-2. Gross interest rate is R = 1.5. Time preference is B = 0.9. Probability of becoming first type is A = 0.2. a) What is the efficient consumption level of type 1 (c; ) and type 2 ( c2). You need to solve for optimality condition and resource constraint. Answer must be numeric. b) Explain why 1
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