Please show how to do 1,2,3 Question 2 In class we saw...
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Please show how to do 1,2,3
Question 2 In class we saw three specific problems in financial economics - savings with two periods and no risk, insurance with one period and no savings, and savings with two periods and risk but with no insurance. Consider now the following situation. A risk-averse decision maker has two consecutive periods to consider. In period 1 initial wealth is wi, and in period 2 initial wealth is w2. In period 1 the individual can decide to save an amount of money s (which may be positive or negative), which returns (1 + r)s additional dollars in period 2 for sure. Then, in period 2, the decision maker faces a risk of losing L dollars (assume L 0. What do you expect would be the effect of an increase in s upon the optimal value of c, assuming first q=p, and then assuming q> p? 3. Again, with p > 0, if q=p, do you expect that the optimal level of savings would be smaller than, greater than or equal to optimal savings if q> p
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Please show how to do 1,2,3