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Under the Diamond-Dybvig framework, assume that individuals have the option to invest a fraction of their currency at a bank and put the remainder under
Under the Diamond-Dybvig framework, assume that individuals have the option to invest a fraction of their currency at a bank and put the remainder under a mattress. Suppose the variable I = fraction invested at the bank. Suppose that ex-ante utility is represented by: U = (1/2) u(C1) + (1/2) u(C2) where C1 is consumption in period 1 and C2 is consumption in period 2, and C1 = 1 - (3/4) I C2 = 1 + 3I With u(C) = - 1 / C a) What is the optimal level of investment, I*? b) What is the optimal level of period 1 consumption, C1*? c) What is the optimal level of period 2 consumption, C2*? d) What is the optimal level of expected utility, U*
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