Show That the Utility Functions V(X,Y)= X^aY^1-A and U(X,Y)= a Ln(X)

question 94

Essay

Show that the utility functions V(X,Y)= X^aY^1-a and U(X,Y)= a ln(X)+ (1-a)ln(Y)represent the same ordering of bundles.

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Definitions:

Liquidity Preference Theory

Theory that investors demand a risk premium on long-term bonds. Implies that the forward rate generally will exceed the expected future interest rate.

Treasury Bond

A Treasury bond is a long-term, fixed-interest government debt security with a maturity of 20 to 30 years and pays interest every six months.

STRIPPED Cash Flows

Cash flows that are separated or "stripped" from an asset for investment or valuation purposes, often for the construction of zero-coupon bonds.

Arbitrage

The practice of taking advantage of price differences in different markets by buying low in one and selling high in another.