To be continued 1. Without the loan market she consume her endowments: C0=100. C=25 2. With the loan market she lend 37.5 now and receive 37.5 later. her consumption is Co=62.5 and c1=62. 5 the same over time she is now better off 3. At the endowment, she prefer I later over 1 now at the optimum, she is different between later and i now
To be continued 1. Without the loan market, she consume her endowments: C 0=100, C1=25. 2. With the loan market, she lend 37.5 now and receive 37.5 later, her consumption is C 0=62.5 and C 1=62.5, the same over time, she is now better off. 3. At the endowment, she prefer 1 later over 1 now; at the optimum, she is different between 1later and 1 now
Example 2 allocating resources across different states 1. Consider an individual, who lives for two dates: now(t=0)and later (t=1). Att=l, the economy can be in state a and state b 2. She is endowed with 100 in state a and 25 in state b 3. Her happiness (utility) depends on her consumption in the two possible state: Ca, and Cb 4. She prefer similar consumption level in the two states 5. There are a financial market where the price of a security that pays only if state a occurs is the same as that of a security that pays l only if state b occurs
Example 2 allocating resources across different states 1. Consider an individual, who lives for two dates: now (t=0) and later (t=1). At t=1, the economy can be in state a and state b; 2. She is endowed with 100 in state a and 25 in state b; 3. Her happiness (utility) depends on her consumption in the two possible state: C a, and C b, 4. She prefer similar consumption level in the two states; 5. There are a financial market where the price of a security that pays 1 only if state a occurs is the same as that of a security that pays 1 only if state b occurs;
To be continued 1. without the securities market she consumes her endowments: Ca=100. Cb=25 2. with the security market, she sell 37.5 unit of security a and buy 37. 5 units of security b. he er consumption is Ca =62.5. and cb=62.5. the same in the two states she is better off 3. At endowment, she prefer l in state b over 1 in state a 4. At the optimal consumption. she is indifferent between 1 in state a and 1 in state b
To be continued 1. Without the securities market, she consumes her endowments: C a=100, C b=25; 2. With the security market, she sell 37.5 unit of security a and buy 37.5 units of security b. Her consumption is C a=62.5, and C b=62.5, the same in the two states, she is better off; 3. At endowment, she prefer 1 in state b over 1 in state a; 4. At the optimal consumption, she is indifferent between 1 in state a and 1 in state b