Econ808midans.01

Econ808midans.01 - The Ohio State University Department of...

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The Ohio State University Department of Economics Econ 808 Midterm Answers for Part 1 Profs Levin, Morelli, and Peck Spring 2001 1. Consider an exchange economy with 2 consumers and one consumption good per state. Both consumers have the (Bernoulli) utility function over certain consumption, u i ( x i )=log( x i ) ; and are von Neumann-Morgenstern expected utility maximizers. Each con- sumer has an initial wealth of 2, which is his/her endowment in states where he/she does not have an accident. For those states in which a consumer is involved in an accident, he/she loses 1 unit of wealth, so his/her endowment is 1. With probability 1 2 , there are no accidents. With probability 1 2 ,consumer 1 is involved in an accident. (Thus, consumer 1 is involved in all accidents.) Conditional on consumer 1 having an accident, he crashes into a tree with probability 1 2 , and collides with consumer 2 with probability 1 2 . When both consumers are in an accident together, assume that neither can sue the other for damages. (a) (14 points) De…ne a competitive equilibrium for this economy, where the two consumers participate on a complete state-contingent commodities market. (b) (19 points) Calculate the competitive equilibrium price vector and allo- cation. Answer: (a) There are three states of nature: in state 1, there is no accident, and it occurs with probability 1 2 ; in state 2, consumer 1 crashes into a tree, and it occurs with probability 1 4

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This note was uploaded on 07/17/2008 for the course ECON 808 taught by Professor Peck during the Spring '02 term at Ohio State.

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Econ808midans.01 - The Ohio State University Department of...

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