Find the efficient allocation of consumption, Business Economics

Assignment Help:

There are two agents, A and B. Both have preferences represented by a von Neumann-Morgenstern utility function u(csj) = ln (csj), where csj is consumption of agent j in state s. Agents have risky endowments ωsj and zs = ωsA + ωsB is the aggregate amount of resources in state s. Suppose there are two possible states, 1 and 2, with probabilities Π1 and Π2.

a) Write down the problem that determines the efficient allocations of consumption in this economy (indicate with λA and λB the Pareto weights of the agents).

789_Find the efficient allocation of consumption.png

b) Find the efficient allocation of consumption when the Pareto weight of B is twice the weight of A.

c) Represent it in an Edgeworth box. What is the marginal rate of substitution (the slope of agents' indifference curves) at the optimum?

d) Why should agent A's consumption be lower than B's even when her income is higher than B's?

e) Suppose that prior to the realization of the uncertainty, agents can trade (buy or sell) two types of securities: asset 1 that promises a payment of 1 unit of resources if state 1 is realized (0 in state 2); asset 2 that promises a payment of 1 unit of resources if state 2 is realized (0 in state 1). Suppose further that the price of asset 1 is 2/3, the price of asset 2 is 1; agents decide how much to buy or sell of each asset taking their prices as given (think of there being many agents like A and B, no one has market power, so we have perfectly competitive markets). Look at the Edgeworth box. How much of each asset do you think agent A would buy or sell? What will agent B want to do? Would they manage to implement an efficient risk sharing?


Related Discussions:- Find the efficient allocation of consumption

Use of risk management techniques significant in is projects, Why is the us...

Why is the use of risk management techniques becoming increasingly significant in IS projects? IS projects: It is like projects in many other disciplines, are becoming i

Payback method to analyse business , The managing director of Christine plc...

The managing director of Christine plc, a company which specialises in acquiring small businesses, has considered the following potential investments. Only one of these investments

Economic analysis, There, you can obtain the available data on GDP and its ...

There, you can obtain the available data on GDP and its components. a. What is the value of nominal GDP during the past 5 years? b. What is the GDP deflator in 2006? c. Wh

What are problems of the sustainability in economic growth, What are the pr...

What are the problems of the sustainability in economic growth? Sustainability Problem in Economic Growth: Recent economic growth makes threats the future quality of life. S

Regulation and deregulation, how does the buying and selling of stock fit t...

how does the buying and selling of stock fit the model for perfect competition?

ECON, 1. A firm has segmented its market into the following demand function...

1. A firm has segmented its market into the following demand functions: P1 = 500 – 50Q P2 = 500 – 20Q with a cost function: MC=AC =20 a. Determine the prof

Consumer behavior, what makes other individuals save more than others

what makes other individuals save more than others

Secondary sector, factors that affect the volume of production in economy

factors that affect the volume of production in economy

What are the economic reasons for protectionism, QUESTION (a) Discuss w...

QUESTION (a) Discuss whether international trade between countries is always beneficial. (b) What are the economic reasons for protectionism? (c) Does the National Income

Define methods used to monitor supplier performance, Define methods which c...

Define methods which can be used to monitor supplier performance. Methods to monitor supplier performance are as follows: a. Approval of designs: The organisation comments o

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd