Exercise 4 Consider an economy with two consumers, Alexia and Bart, who live two periods, t = 0and t = 1. In each period they can consume one type of good and their preferences for consumption aregiven byU (co, c²) = c(c²)² _i = A, B.Alexia and Bart have the following endowment of good in each periodM=1, M₁ = 1, MB = 2, MB = 2.In t = 0, Alexia and Bart can exchange a financial contract for the delivery of one unit of consumptiongood in t = 1 (a bond). Name p the price of the bond and b² the amount bought by agent i = =A, B.(a) Write down each agent's utility maximization and budget constraints assuming that he/she can tradethe bond without restrictions.(b) Find each agent's optimal quantity b² as a function of the bond net return r.(c) Find the equilibrium value of r and the equilibrium demand/supply of each agent.

Referencehttps://www.imf.org/external/pubs/ft/mfsmcg/c4.pdf

Answered: Exercise 4 Consider an economy with two…

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter4: Utility Maximization And Choice

Section: Chapter Questions

Problem 4.3P

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