subjective expected utility(SEU) Q4. Suppose there are two states of the worldS = {$1, s2} and a consumer with utility u(x) = In x , income l=10 and the SEU priors P(s1) = 0.2 and P(s2) = 0.8.(a) Suppose the Arrow assets are directly available and obtain the consumer's demand.(b) Suppose that the Arrow assets are not directly available in the market, however, the consumers can trade a riskless bond that delivers return (1, 1) and a risky assetwith return (1,-1). What are the prices of the riskless bond and the risky asset in terms of the Arrow prices pj and p2?

Arrow-Debreu charges represent the costs of contingent claims on future states of the arena. They…

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Economics

onsumer with utility

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

subjective expected utility(SEU)

Q4. Suppose there are two states of the worldS = {$1, s2} and a consumer with utility u(x) = In x , income l=10 and the SEU priors P(s1) = 0.2 and P(s2) = 0.8.
(a) Suppose the Arrow assets are directly available and obtain the consumer's demand.
(b) Suppose that the Arrow assets are not directly available in the market, however, the consumers can trade a riskless bond that delivers return (1, 1) and a risky asset
with return (1,-1). What are the prices of the riskless bond and the risky asset in terms of the Arrow prices pj and p2?

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