Suppose there are only two period, this and next year. There are two states of the economy in the next year: good state

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Suppose There Are Only Two Period This And Next Year There Are Two States Of The Economy In The Next Year Good State 1 (64.06 KiB) Viewed 39 times

Suppose there are only two period, this and next year. There are two states of the economy in the next year: good state and bad state, each happening with probability 0.5. Amy has a stable job and her income is constant at 500 unit of money across both states. Amy currently has an initial wealth of 2000 available for investing either in stock or in bond. Each unit of the stock, selling at a price of 1.3 now, pays off 2 (unit of money) in the good state and 1 (unit of money) in the bad state. The bond, on the other hand, guarantees an interest rate of 5 percent next year (regardless of states). Assume next year is the last relevant period, so consumption coincides with wealth in either state. (a) Suppose Amy does not face short-sale constraint. Describe, in terms of state-wealth, the budget set facing Amy.