Quiz IV

Suppose in an economy with two physical goods that a consumer has endowment $(1, 1)$ at time 0, $(1,0)$ in state 1 and $(0,2)$ in state 2. Arrow-Debreu prices at time 0 are $(1,1)$, are $(1,2)$ in state 1 and $(1,1)$ in state 2.

1. Check that the consumption bundle $x$ which contains $(1,1)$ at time 0, $(1/2,1/2)$ in state 1 and $(3/4,3/4)$ in state 2 is affordable
2. Suppose now a Radner economy with the same endowments and the equivalent Radner prices. Suppose asset 1 is a bond that pays off 1 unit of numeraire in each state, and asset 2 pays off 1 unit in state 1 and 0 otherwise. Find the asset prices, and the portfolio z that makes the consumption bundle $(x,z)$ budget-feasible.

 

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