Reference no: EM133064194

Based on the Diamond-Dybvig (1983) model. Specifically, there are three periods, denoted t ,,t .t = 012, a single consumption good, and an illiquid investment opportunity that pays gross return 1 if liquidated at = 1, or gross return 22 if liquidated at = 2.

There are 500 people in the economy, each endowed with 1 unit of the consumption good at t = 0. At t = 1, exactly 200 will randomly realize that they need to consume at t = 1 (impatient consumers), the remaining 300 people will need to consume at t = 2 (the patient consumers). The utility derived from consumption is 1 - (1/c₁)² for early consumers, 1-(1/c₂)² for late consumers, where the subscript denotes the time of consumption.

1. Calculate the expected return (from a t = 0 perspective) of direct investing.
2. Calculate the expected utility (from a t = 0 perspective) derived from direct investing.