1. For each of the following scaling functions for a von Neumann-Morgenstern utility func- tion, determine the Marginal Rate of Substitution between X₁ and X2 and the equation for an indifference curve through the consumption bundle (100,100) (solve for X₂ on the left hand side of the equation). State 1 is the bad outcome that occurs with probability 0.2 and State 2 the good outcome that occurs with probability 0.8. Graph these indif- ference curves and comment on what you see. Is a consumer with these preferences risk averse, risk neutral, or risk loving? (a) V(X) = InX (b) V(X)=√X (c) V(X) = X (d) V(X) = X²
1. For each of the following scaling functions for a von Neumann-Morgenstern utility func- tion, determine the Marginal Rate of Substitution between X₁ and X2 and the equation for an indifference curve through the consumption bundle (100,100) (solve for X₂ on the left hand side of the equation). State 1 is the bad outcome that occurs with probability 0.2 and State 2 the good outcome that occurs with probability 0.8. Graph these indif- ference curves and comment on what you see. Is a consumer with these preferences risk averse, risk neutral, or risk loving? (a) V(X) = InX (b) V(X)=√X (c) V(X) = X (d) V(X) = X²
Chapter3: Preferences And Utility
Section: Chapter Questions
Problem 3.4P
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