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 evaluating a policy or institution, What are the fa...

What are the factors of evaluating a policy or institution? Factors to consider during evaluating a policy or institution comprise: • Internal and external constraints onto

Growth in private capital flows, Growth in Private Capital Flows is explain...

Growth in Private Capital Flows is explained below: There has been a extraordinary growth in private capital flows since the 1990s. For instance, the value of capital flow tran

Graphing Taxation., Demonstrate graphically the cost of income taxation of ...

Demonstrate graphically the cost of income taxation of 30% to consumers and producers for an income of $27,908. How does the taxation change if the income was $220,874? How does

Foreign exchange derivatives and managing exchange risk, Assume that Debora...

Assume that Deborah Electronics expects a delivery of Fujitsu laptops in a month from a Japanese supplier. Each laptop sells at $1000 in the retail market whereas the import cost i

How can trade agreements assist development, How can trade agreements assis...

How can trade agreements assist development? A trade agreement is while two or more countries to by decrease or abolish tariffs, non-trade and quotas barriers which are establ

What are the limitations of balanced growth, What are the limitations of ba...

What are the limitations of balanced growth? The limitations of balanced growth: • The strategy of balanced growth is away from the resources of most poor countries; • Go

Explain the implications international capital flows problem, Explain the i...

Explain the implications international capital flows problem. Implications: • FDI can assist physical capital accumulation and result within growth - usually beneficial b

Explain the primary competitors of corporation, 1.) Write a concise one-par...

1.) Write a concise one-paragraph summary (no more than ½ a page!) of the corporation. This would include, for example, its products, its industry, its primary competitors, the exc

Elasticity, how the concept of elasticity used for policy formulation

how the concept of elasticity used for policy formulation

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