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State the agent budget constraints

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Let's focus now on the problem of a single agent our OLG economy. As usual, she receives an endowment y = 5 when young and nothing when old. The agent has the option to buy 2 assets a and b in order to save for the future (there is no money). Asset a and b rates of return are ra, rb respectively. She has a typical log utility: u(c1, c2) = log(c1) + log(c2).

  1. State the agent's budget constraints.
  2. Suppose that ra = 2, rb = 1. What is the optimal demand for assets a and b?
  3. What is the condition on ra and rb to make the agent accept to carry both assets?
  4. If rb = 1 and the agent controls the returns of asset a such that raa = 2a1/2, what is the the optimal demand for a and b?

Reference no: EM132812948

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