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

Atmosphere, how get atmosphere pollution and its solution

how get atmosphere pollution and its solution

Supply and demand, analyse the effect of an increase in the price of sim ca...

analyse the effect of an increase in the price of sim cards on the equilibrium price and equilibrium quantity of cellphones handsets

Entrepreneurship, what do you call an entrepreneur using someone elses idea...

what do you call an entrepreneur using someone elses ideas to start a business

Is dependency a problem in less developed countries, Is dependency a proble...

Is dependency a problem in Less Developed Countries? Problem: DCs exploit Less Developed Countries by extracting their surplus value. This value becomes the difference among

The challenging task of evaluating ‘e-government'' projects, QUESTION (...

QUESTION (a) Senior executives of the public sector are now faced with the challenging task of evaluating ‘e-Government' projects. Discuss the main character features involved

What do you meant by contract management, Problem (a) What do you mea...

Problem (a) What do you meant by Contract Management and what is the central aim of contract management? (b) Show the end-of-contract options and describe the cost involve

Help, Ask quethe monthly revenue of a certain comany is given by R=820p-7^2...

Ask quethe monthly revenue of a certain comany is given by R=820p-7^2p,where p is the price in dollars of the product the company manufacturers. at what price will the revenue be $

How does resource enhancement improve development, How does resource enhanc...

How does resource enhancement improve development? Enhancements in the quantity and quality of resources increases productivity hence incomes. Enhanced management raises outpu

Explain why it is important to plan the design of a website, QUESTION T...

QUESTION The first stage of e-Government involves the creation of a web presence through websites. Discuss the benefits and challenges of a governmental website and explain why

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