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

What are the factors of the economic sectors, What are the factors of the e...

What are the factors of the economic sectors? The factors of the economic sectors: • Primary sector including natural resources as like agriculture, fishing, quarrying minin

Price elasticity of demand, Aska) Explain why each of the following factors...

Aska) Explain why each of the following factors may influence the own price elasticity of demand for a commodity. (i) Consumer preferences, that is, whether consumers regard the c

Laws of returns to scale, is indian companies running a risk by not giving ...

is indian companies running a risk by not giving attention to cost cutting?

Supply, causes of exceptional supply curve

causes of exceptional supply curve

#t, opportunity cost and decision making

opportunity cost and decision making

Is unemployment and underemployment a problem, Is unemployment and underemp...

Is unemployment and underemployment a problem? The cost of unemployment is both: • Economic along with the opportunity cost of lost output raised poverty and inequality

Transactions and precautionary demand, 1.Classify each of the following as ...

1.Classify each of the following as related to the transactions demand, precautionary demand, or asset (speculative) demand for money. Explain: (a) Rodrigo keeps $200 in cash in

What is the difference between wealth and income, What is the difference be...

What is the difference between wealth and income? Difference between wealth and income: • Wealth , which is a stock value that is the current value of assets for example b

Types of transaction on the capital account, Types of Transaction on the Ca...

Types of Transaction on the Capital Account are stated below: It is useful to recall the basic types of transactions recorded on the capital account: foreign portfolio investme

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