Essay About Pic And Consumer’S Budget Constraintat Date

Financial Crisis Coursework
Financial Crisis Coursework 2                                                        Problem1.Under no arbitrage condition=1[pic 1][pic 2][pic 3]For (a)[pic 4][pic 5]       [pic 6][pic 7]        [pic 8][pic 9]So price vector (a) is consistent with equilibriumFor (b)[pic 10]     [pic 11][pic 12]       [pic 13][pic 14][pic 15]So price vector (b) is not consistent with equilibriumFor (c) [pic 16][pic 17]     [pic 18][pic 19]       [pic 20][pic 21]So Price vector (c) is not consistent with equilibriumProblem 2[pic 22][pic 23][pic 24]So the quantities satisfy the consumer’s budget constraintAt date 1, after the true states has been revealed consumers can buy goods for delivery at dates1 and 2 subject to budget constraint [pic 25]So     [pic 26][pic 27]       [pic 28]       [pic 29][pic 30]       [pic 31]If     [pic 32][pic 33]So at date 0=1[pic 34]So satisfy     the budget constraint[pic 35]Problem 3As we treat consumption at date 1 as numeraire in each state  [pic 36][pic 37][pic 38][pic 39]The price in date 2 should be adjusted[pic 40][pic 41]Consumption of Arrow securities[pic 42][pic 43]The budget constraint is          [pic 44]So [pic 45]As =1 remain the same[pic 46][pic 47]So the price of Arrow security [pic 48]Problem 4                            Region A        Region BState (H, L)                                      [pic 49][pic 50]State (L, H)                                       [pic 51][pic 52][pic 53]