Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Microeconomics Expert

problem1.  Consider a world with two assets: a riskless asset paying a zero interest rate, and a risky asset whose return r can take values +10% or –8% with equal probability.

An individual has preferences represented by the utility function u(x) = ln x and an initial wealth w0 = 10.

i) Solve the portfolio choice problem of the agent. What is the optimal amount z* of risky assets?
 
Assume now that the agent also faces an exogenous additive background risk ε, with a distribution independent of  r, that can take values +4 or –4 with equal probability (additive means that the agent’s final wealth x is given by the portfolio of assets plus ε).  
 
ii) Show that this background risk reduces the demand for risky assets. 
 
problem2. The Barcelona Football Club is considering the signing of a player of international fame. The problem is that the player has a reputation for having a weak knee. The probability that the club assigns to the event that the player is injured during the season (state θ1) is 30%. The expected revenue is €18 million if there are no injuries (state θ2) and €3 million if there is an injury (state θ1). Assume that the club is risk neutral and wants to maximize the expected profit.
 
i) If the cost of the contract is €15 million, what is the club’s optimal decision? What is the expected profit? 
 
We now consider the possibility that the club, before making its decision, can have the player pass a medical examination. Doctors can issue a negative report (β1), suggesting that his knee is not strong enough to endure the season, or positive (β2), suggesting that his knee is fine. The probability that the medical report is negative when the knee is really bad, P(β1¦θ1), is 80%, the probability that the report is positive when the knee is really good, P(β2¦θ2), is also 80% (in other words, in each state there is a 20% chance that the doctors are wrong).

ii) Represent the decision tree when the medical examination is done. 
 
iii) Compute the joint probabilities P(βj, θi), the probabilities of the signals P(βj), and the conditional probabilities P(θi¦βj). 
 
iv) What is the club’s optimal strategy? What is the expected profit?
 
v) What is the value of the doctors’ opinion?

problem3.  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 states. Suppose there are two possible states, 1 and 2, with probabilities π1 and π2.
 
i) prepare down the problem that determines the efficient allocations of consumption in this economy (indicate with λA and λB the Pareto weights of the agents).
 
Take now ω1A = 60, ω2A = 0, ω1B = 30, ω2B = 60, and π1 = π2 = 1/2.  
 
ii) Find the efficient allocation of consumption when the Pareto weight of B is twice the weight of A. 
 
iii) Represent it in an Edge worth box. What is the marginal rate of substitution (the slope Of agents’ indifference curves) at the optimum?
 
iv) 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 Edge worth 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?

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M9472

Have any Question? 


Related Questions in Microeconomics

Assignmentdfds are process diagrams that emphasize the data

Assignment DFDs are process diagrams that emphasize the data consumed, produced, and stored by processes under discussion. Complex processes are decomposed into their constituent elements to reveal the most elemental sub ...

Discussion questionon the surface hinduism appears

Discussion Question On the surface, Hinduism appears radically different from Abrahamic religions like Islam and Judaism. However, Hindu teachings state that there is a single divine essence in the universe. Consider too ...

Problem 1 roberts new way vacuum cleaner company is a newly

Problem 1: Robert's New Way Vacuum Cleaner Company is a newly started small business that produces vacuum cleaners and belongs to a monopolistically competitive market. Its demand curve for the product is expressed as Q ...

Recall from lecture the two facts we discussed one no

Recall from lecture the two facts" we discussed: One, no product exists at a vacuum; and two relationships among products change over time. Recall the background factors of demand: consumer preferences/ Wants; consumer i ...

Discuss the security issues in addition to simple customs

Discuss the security issues (in addition to simple customs requirements) that your company must consider when transporting customers' goods across international borders. Do the markets your company usually serves make th ...

Economics money bankingintroductioneconomics money and

Economics Money Banking Introduction Economics Money and Banking focuses on the traditional model of money and banking in the American banking system, a mixed capitalist economy. The course explains the functions of mone ...

Technological advancement for firms- econin consideration

Technological Advancement for Firms- ECON In consideration of the arguments made by Chandler, Enduring Logic of Industrial Success, answer this question: • What role will technological advancement play in the future evol ...

Assignment elasticity of demandin this assignment you will

Assignment: Elasticity of Demand In this Assignment, you will focus on marginal utility, Price Elasticity of Demand, and understanding the difference between Price Elasticity of Demand and Income Elasticity of Demand. We ...

Prepare 100 words summary for class discussioncreative

Prepare 100 words summary for class discussion Creative Destruction by W. Michael Cox and Richard Alm Joseph Schumpeter (1883-1950) coined the seemingly paradoxical term "creative destruction," and generations of economi ...

Assignment perfectly competitive and monopoly firmsin this

Assignment: Perfectly Competitive and Monopoly Firms In this Assignment, you will calculate total cost, total revenue, and total profit/loss. Based on the computed results, you will determine the optimal quantity of outp ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

A cola-dispensing machine is set to dispense 9 ounces of

A cola-dispensing machine is set to dispense 9 ounces of cola per cup, with a standard deviation of 1.0 ounce. The manuf

What is marketingbullwhat is marketing think back to your

What is Marketing? • "What is marketing"? Think back to your impressions before you started this class versus how you

Question -your client david smith runs a small it

QUESTION - Your client, David Smith runs a small IT consulting business specialising in computer software and techno

Inspection of a random sample of 22 aircraft showed that 15

Inspection of a random sample of 22 aircraft showed that 15 needed repairs to fix a wiring problem that might compromise

Effective hrmquestionhow can an effective hrm system help

Effective HRM Question How can an effective HRM system help facilitate the achievement of an organization's strate