Consider a trader i has following utility function: u;(x1, X2) = x† xª, 1-a where x; refers to the quantity of asset with price pi, and i = 1,2 in this case. Suppose the total money of this trader to be completely used for trading is M, and during the whole trading process the price of asset remains constant. (a) Determine the optimal quantity x for each asset that this trader can buy when she wants to maximize her utility function. (b) Describe in words about her preferences correponding to a = 0, a = 1, and α 0.5.

Consider a trader i has following utility function: u;(x1, X2) = x† xª, 1-a where x; refers to the quantity of asset with price pi, and i = 1,2 in this case. Suppose the total money of this trader to be completely used for trading is M, and during the whole trading process the price of asset remains constant. (a) Determine the optimal quantity x for each asset that this trader can buy when she wants to maximize her utility function. (b) Describe in words about her preferences correponding to a = 0, a = 1, and α 0.5.

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter9: The Basic Tools Of Finance

Section: Chapter Questions

Problem 9PA

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