Maximization Decision Problem Derivation and Relationships Quiz
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Questions and Answers

What property is displayed by the total expected utility function E(U) = Ut + θE(Ut+1)?

  • Additive (correct)
  • Subtractive
  • Multiplicative
  • Divisive
  • What does the individual maximize to choose Ct and stochastic Ct+1 optimally?

  • Total Utility (correct)
  • Expected Return
  • Expected Consumption
  • Marginal Utility
  • What constraint is used for substitution in solving the individual's choice optimization problem?

  • (Xt-Ct)(1-Rt+1)+Xt+1 = Ct+1
  • (Xt+Ct)(1+Rt+1)+Xt+1 = Ct+1
  • (Xt-Ct)(1+Rt+1)+Xt+1 = Ct+1 (correct)
  • (Xt+Ct)(1-Rt+1)+Xt+1 = Ct+1
  • What is the slope of the Utility function U(C) in terms of marginal utility?

    <p>Positive and decreasing</p> Signup and view all the answers

    In the individual's choice problem, what financial asset has a stochastic return Rt+1 that needs to be considered?

    <p>Single financial asset</p> Signup and view all the answers

    What does risk aversion imply for individuals in terms of consumption smoothing?

    <p>Individuals want to decrease the volatility of consumption.</p> Signup and view all the answers

    What determines an asset's average return (price) in the Consumption-Based Capital Asset Pricing Model?

    <p>The degree to which the asset provides consumption smoothing.</p> Signup and view all the answers

    In the Consumption-Based Capital Asset Pricing Model, what is U'(Ct) where Ct represents consumption at time t?

    <p>Rate of return for the individual at time t</p> Signup and view all the answers

    What does the parameter θ represent in the context of individual's subjective rate of time preference?

    <p>Indifference point between saving and consuming today</p> Signup and view all the answers

    Which factor does the risk of an asset depend on in the Consumption-Based Capital Asset Pricing Model?

    <p>Stochastic interaction between asset return and consumption</p> Signup and view all the answers

    How is an individual's inter-temporal utility described in the Consumption-Based Capital Asset Pricing Model?

    <p>It is additive and separable.</p> Signup and view all the answers

    What does Equation (4) imply about the price of the asset?

    <p>The price of the asset is determined by the expected present value of future consumption.</p> Signup and view all the answers

    How is the behaviour of the Stochastic Discount Factor (SDF) primarily influenced?

    <p>By future labour income.</p> Signup and view all the answers

    For large values of labour income, how does the SDF typically behave?

    <p>The SDF is low.</p> Signup and view all the answers

    In Figure 1, what does the probability distribution represent?

    <p>Probability distribution of Ct+1.</p> Signup and view all the answers

    What does the result in Figure 2 depend on?

    <p>U’(C)&gt;0, U’’(C)</p> Signup and view all the answers

    What does the equation (2) reveal about the relationship between Ct and Ct+1?

    <p>Ct depends on the value of Ct+1</p> Signup and view all the answers

    What is the Stochastic Discount Factor (SDF) according to the text?

    <p>Ratio of present value of marginal utilities of (optimal) consumption at t and (optimal stochastic) consumption t+1</p> Signup and view all the answers

    What does equation (3) in the text suggest about the stochastic return Rt+1?

    <p>Rt+1 should satisfy a specific valuation equation</p> Signup and view all the answers

    What is the main purpose of interpreting equation (3) as a pricing equation in the text?

    <p>To establish a connection between financial assets and present consumption</p> Signup and view all the answers

    What does the optimising expression (equation 2) imply about the relationship between present and future consumption according to the text?

    <p>The expected utility of future consumption equals the present value of utility today</p> Signup and view all the answers

    In terms of pricing, what does the ratio (1+R)=Ф/P represent in the context provided?

    <p>The relationship between financial asset payoff and asset price</p> Signup and view all the answers

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