Will there be any investment at given date

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Question: 1. Consider the same problem as in exercise 8, except now both types are impatient. The discount factor for type 1 is now β1 = 0.65 and the discount factor for type 2 is β2 = 0.65. Show that in this case neither type will invest at all.

2. Consider again an economy like the one described in except that in this case all individuals face the risk of a negative shock at the end of period 2. The shock occurs with 50 percent probability. If individuals are hit by a negative shock, all their savings will be totally wiped out. Show that in this case, it is better for both types not to save in period 1. Will there be any investment at date 2? Explain your answer.

Reference no: EM132174828

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