please urgentttt Question 3In class discussions about uncertainty we assumed that the utility levels in eachstate of nature depends on c, which we might interpret as some aggregate con-sumption and we expressed utility as U(c). Now, let's extend this to a casewhere the utility level depends on consumption of two goods (this was the typeof utility we used mainly in this course).Ben is a farmer who grows wheat and barley. However, his harvest is uncertain.If weather is good, he gets 200 lbs of wheat and 200 lbs of barley. If weatheris bad, he gets only 100 lbs of wheat and 100 lbs of barley. His utility in eachstate of nature is U (w, b) = w¹/4b³/4, where w and b represent his consumptionof wheat and barley, respectively. Prices of wheat and barley are $1 in bothstate of nature. The probability of good weather is T.Question 3 Part aExpress Ben's expected utility function. (Hint: find Ben's optimal consumptionin each state of nature first)Question 3 Part bLet's assume = 0.5. Knowing tha bad weather reduces his harvest, Bencontemplates to purchase an insurance. He can purchase an insurance at a costof 20 cents for each $1 worth of coverage. So, for each $1 of insurance premiumhe will receive $5 in bad weather. How much insurance would Ben purchase?

Uncertainty is a situation in which there is a piece of imperfect information. It relates to the…

In class discussions about uncertainty we assumed that the utility levels in each state of nature depends on c, which we might interpret as some aggregate con- sumption and we expressed utility as U(c). Now, let's extend this to a case where the utility level depends on consumption of two goods (this was the type of utility we used mainly in this course). Ben is a farmer who grows wheat and barley. However, his harvest is uncertain. If weather is good, he gets 200 lbs of wheat and 200 lbs of barley. If weather is bad, he gets only 100 lbs of wheat and 100 lbs of barley. His utility in each state of nature is U (w, b) = w¹/4³/4, where w and b represent his consumption of wheat and barley, respectively. Prices of wheat and barley are $1 in both state of nature. The probability of good weather is T.

In class discussions about uncertainty we assumed that the utility levels in each state of nature depends on c, which we might interpret as some aggregate con- sumption and we expressed utility as U(c). Now, let's extend this to a case where the utility level depends on consumption of two goods (this was the type of utility we used mainly in this course). Ben is a farmer who grows wheat and barley. However, his harvest is uncertain. If weather is good, he gets 200 lbs of wheat and 200 lbs of barley. If weather is bad, he gets only 100 lbs of wheat and 100 lbs of barley. His utility in each state of nature is U (w, b) = w¹/4³/4, where w and b represent his consumption of wheat and barley, respectively. Prices of wheat and barley are $1 in both state of nature. The probability of good weather is T.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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