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# tutorial 10 - TUTORIAL 10 WEEK 11 ECON3107/ECON5106...

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TUTORIAL 10– WEEK 11 ECON3107/ECON5106 – Economics of Finance (Arrow-Debreu Economy (similar to Danthine and Donaldson, ch. 8) Consider a world in which there are only two dates: 0 and 1. At date 1 there are three possible states of nature: a bad weather state (BW) and a good weather state (GW). That is: s 1 S 1 = { GW, BW } , while the state at date zero is known: call it s 0 if you will. The BW state occurs with probability π ( s 1 = BW ) = 1 / 3 , while the GW state occurs with probability π ( s 1 = GW ) = 2 / 3 . There is one non-storable consumption good - say apples. There are two consumers in this economy. heir preferences over apples are exactly the same and are given by the following expected utility function 1 2 c i 0 ( s 0 ) + β X s 1 S 1 π ( s 1 ) ln ( c i 1 ( s 1 ) ) , where subscript i = 1 , 2 denotes consumers. The consumer’s time discount factor, β, is 0 . 9. The consumers differ in their endowments which given in the table below: Consumers Endowments t = 0 t=1 t=1 BW GW Consumer 1 10 1 2 Consumer 2 5 4 6 In this economy the only traded securities are basic Arrow securities.
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