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This question applies to parts 1-10. It contains drop-down multiple choice and numerical questions. Consider a world in which there are only two dates: 0
This question applies to parts 1-10. It contains drop-down multiple choice and numerical questions. Consider a world in which there are only two dates: 0 and 1. At date 1 there are three possible states of nature: a good weather state (G), a fair weather state (F), and a bad weather state (B). The state at date zero is known. There is one non-storable consumption good, apples. There is one representative consumer in the economy. The endowment of apples at time 0, is 2. At time 1 the endowment of apples is state-dependent. The physical probabilities, It, and state-dependent endowments, e, of the states at time 1 are given in the table: State Probability Endowment G 0.4 4 0.3 2 B 0.3 1 The expected utility is given by u(co) + PIG . u(cG) + #F . u(CF) + AB . u(cB)], where the instantaneous utility function is: u (c) = In(c) (natural logarithm). The consumer's time discount factor, B, is 0.95. Note: round your answers to 2 decimal places if necessary. 1) At least how many different securities is required for this market to be complete? + For the rest of this question, consider Arrow-Debreu securities are available. 2) Compute the equilibrium fair weather state price: 3) Compute the equilibrium traded quantity of the fair weather atomic (Arrow-Debreu) security: 4) Compute the equilibrium quantity consumed in the bad weather state: 5) In this Arrow-Debreu economy, maximization of expected utility reflects the assumption of: + 6) To solve for the Arrow-Debreu equilibrium, we need to do the following EXCEPT: 7) The agent in this economy is 8) The stochastic discount factor of the good weather state is 9) Assume now that the instantaneous utility is u (c) = 10c and all other parameters remain the same. Compute the discount factor: 10) Assume again that the instantaneous utility is u (c) = 10c and all other parameters remain the same. Compute the risk premium of the good weather atomic (Arrow-Debreu) security
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