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Find the equilibrium interest rate

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Suppose we have a model ofin0and1"today"and"tomorrow"andinisofandin the economy which there are only two periods, t = t = ( ), which there only a single good, (call it dollars). Consumers are endowed with some units the good today, will be endowed again with some units tomorrow, but their endowments tomorrow will depend ( a way that's known today) on which one of three states of the world will have occurred after today and before tomorrow Let = { , , }. Consumers have differing state-dependent preferences consumption bundles = ( 0 , , , ). No production or storage is possible. Assume that the unique Arrow-Debreu complete contingent claims equilibrium prices are = 1/8 , M = 1/4 , = 1/4 .

a) Find the equilibrium interest rate (r)

b) How many units Yi of each of the securities a consumer would need to hold in order to ensure that she will receive the state-dependent payout (ZH, ZM, ZL) = (1, 2, 2) where = - 0.

Reference no: EM132753260

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