An investor has preferences represented by a utility function u(c) and initial wealth w > 0. Consider an asset that pays G with probability \pi and B with probability 1- \pi . 1.1 Suppose the investor owns this asset. What is the minimum price he would sell it for? (It is sufficient to formulate the condition that this price must satisfy). 1.2 Suppose he does not own it. What is the maximum price he would be willing to pay to buy it? (It is sufficient to formulate the condition that this price must satisfy). 1.3 Explain why (or under which conditions) the buy and sell prices you have found are or are not the same. 1.4 Suppose w = 10, G = 10, B = 5 and u(c) = vc. Compute the buy and sell prices.

An investor has preferences represented by a utility function u(c) and initial wealth w > 0. Consider an asset that pays G with probability \pi and B with probability 1- \pi . 1.1 Suppose the investor owns this asset. What is the minimum price he would sell it for? (It is sufficient to formulate the condition that this price must satisfy). 1.2 Suppose he does not own it. What is the maximum price he would be willing to pay to buy it? (It is sufficient to formulate the condition that this price must satisfy). 1.3 Explain why (or under which conditions) the buy and sell prices you have found are or are not the same. 1.4 Suppose w = 10, G = 10, B = 5 and u(c) = vc. Compute the buy and sell prices.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.8P

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