2.- Recall the model of an investor whose investment income is taxed at rate t. The investor has §w in cash and chooses an amount æ to invest in a risky project (so 0 0. If the project is "bad" its net return per dollar is $r;, where –1 < r; << 0. The investor's contingent consumption is (Cg, Ca) = (w+ (1 – t) ær,, w + (1 – t)2ærs) %3D where c, is consumption if the project is "good" and , is consumption if the project is “bad". Let p denote the probability that the project is "good". Suppose that the investor (whose name is Avril) is risk loving with utility-of-money function v (c) = c². Let p =t=r, = }, n = - and w = 10. (a) What is Avril's contingent consumption if x = 0? (b) What is Avril's contingent consumption if x = 10? (Express the consumption level in each state as a fraction, not a decimal.)
2.- Recall the model of an investor whose investment income is taxed at rate t. The investor has §w in cash and chooses an amount æ to invest in a risky project (so 0 0. If the project is "bad" its net return per dollar is $r;, where –1 < r; << 0. The investor's contingent consumption is (Cg, Ca) = (w+ (1 – t) ær,, w + (1 – t)2ærs) %3D where c, is consumption if the project is "good" and , is consumption if the project is “bad". Let p denote the probability that the project is "good". Suppose that the investor (whose name is Avril) is risk loving with utility-of-money function v (c) = c². Let p =t=r, = }, n = - and w = 10. (a) What is Avril's contingent consumption if x = 0? (b) What is Avril's contingent consumption if x = 10? (Express the consumption level in each state as a fraction, not a decimal.)
Chapter7: Uncertainty
Section: Chapter Questions
Problem 7.7P
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