Consider the following two period sequence economy. There are two dates, t= 0,1, two states of nature, s = a, ß, at t=1,

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Consider The Following Two Period Sequence Economy There Are Two Dates T 0 1 Two States Of Nature S A Ss At T 1 1 (171.18 KiB) Viewed 23 times

Consider the following two period sequence economy. There are two dates, t= 0,1, two states of nature, s = a, ß, at t=1, and two physically distinguishable goods, 1 = 1,2, in each state. Importantly, neither good is available for consumption at t= = 0. So a typical element of the commodity space is (x1a, X2a, X18, X2B), and spot market prices are given by a vector p = (Pla, P2a, P18, P2B). Prices can be normalised in each state, so set la, Pla = P18 = 1. = There is one real asset with price q and with the same payoff vector (1,0) in each of the two states. (a) Denote an individual's endowment by (wla, w2a,W18, w2B). What is the individual's Arrow-Radner budget set at the prices (p, q)? [20%] (b) Argue that in any AR equilibrium, each individual holds zero units of the asset. [30%] (c) Use the property identified in (b) to calculate the demand function of an individual whose endowment is (0,2,2,0) and whose preferences are represented by the utility function u(x) = Xla + e min{218, 228}, where e E (0,1). [50%] =