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ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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Now suppose agent C can produce private information about the true realization x at t=1 at the cost γ=4. Suppose lA=lB=φA=φB=1 and x is either 40 or 100 with equal probability and w=70.
- At t=1, agent B owns the bond. What is the maximum amount LB that agent B can borrow with probability 1?
- At t=0, what amount LA can agent A borrow from agent B in a repo trade at t=0 and what is the haircut in equilibrium?

Transcribed Image Text:Consider an exchange economy with three dates {t=0, 1, 2} and three agents {A, B, C} with
utility functions:
UA=CA0 + (1-lA)( CAi+ CA2)
UB=CB0+CB1+ (1-/B)CB2
Uc=Ccot Cci+ Cc2
The agents have the following endowments. Agent A owns a bond at t=0 and obtains w at t=1
with probability (1-QA). Agent B owns w at t=0 and obtains w at t=2 with probability (1-QB).
Agent C owns w at t=1 and nothing at the other dates. Furthermore, the bond pays off x at t=2.
The risk free rate and repo rate are zero.
Suppose x is either 0 or 100 with equal probability and w=50.
Suppose la=lg=QA=QB=1 for questions (a) to (c).
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