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Suppose a representative consumer with preferences E0 1 X t=0 t log(ct). Suppose also a representative firm, which produces yt at each period t. Production
Suppose a representative consumer with preferences E0 1 X t=0 t log(ct). Suppose also a representative firm, which produces yt at each period t. Production yt is exogenous, and evolves according to the following stochastic process: yt = y 1, with probability ; y2 , with probability 1 , where y1 > y2 > 0 and 2 (0, 1). There is a fixed quantity of one unit of shares of the representative firm. Each share entitles the owner to a fraction of the firm's production next period (i.e. dividends, since production costs are zero)
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