Suppose a consumer faces uncertainty over his income in period and he assumes following utility function max E,{u(c,)+ Bu(c,)} subject to c =1-a;c, =w, +(1+r)a, where income in period 2, w, is uncertain. w, is subject to two states with probability of 1+ɛ with probability p and 1- ɛ with probability 1- p. Given these conditions, derive the Euler condition under uncertainty.

Suppose a consumer faces uncertainty over his income in period and he assumes following utility function max E,{u(c,)+ Bu(c,)} subject to c =1-a;c, =w, +(1+r)a, where income in period 2, w, is uncertain. w, is subject to two states with probability of 1+ɛ with probability p and 1- ɛ with probability 1- p. Given these conditions, derive the Euler condition under uncertainty.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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