What is the equilibrium price ratio of the shares

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Reference no: EM132206695

Question: Martina and Christian are investors who trade stocks of two companies specializing in the sale of agricultural products â€" Bysto & Co. (B) and Polan & Co. (P). There are no other investors besides Martina and Christian. Revenues from stocks are risky because they depend on whether there is much or little rain during the summer. Both situations (much and little rain) are equally likely. The dividend per single share of Bysto & Co. amounts to 1 PLN if the summer is rainy, and 0 otherwise. For Polan & Co., the contrary holds, i.e., the dividend per single share of that company is 0 if the summer is rainy, and 1 otherwise. Martina owns 100 shares of Bysto &Co. and does not have any shares of Polan & Co., while Christian has 100 shares of Polan & Co. and does not have any shares of Bysto & Co. Both Martina (M) and Christian (C) maximize their expected utility given by the following formula: Ui(B,P) = Â½lnB + Â½lnP, where i = {M,C}.

a) In the Edgeworth box, indicate the initial endowments and explain whether it is an efficient allocation or not.

b) What is the equilibrium price ratio of the shares? How much of the shares will each of the two investors own in the equilibrium?

c) Discuss Martina's and Christian's risk related to the split of the shares in the initial situation and in the equilibrium. Which of these two allocations is less risky?

Reference no: EM132206695

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