Using the definition of the certainty equivalent level of consumption provide an expression for the ratio, u(Cce)-u(CL) u(CH)-u(CL)*

ENGR.ECONOMIC ANALYSIS
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Chapter1: Making Economics Decisions
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Consider the lottery that assigns a probability T of obtaining a level of consumption CH
and a probability 1-T of obtaining a low level of consumption c, with CH > C1. Consider
an individual facing such a lottery with utility function u(c) that has the properties that
more is better (that is, a strictly positive marginal utility of consumption at all levels of
c) and diminishing marginal utility of consumption, u"(c) < 0. As usual, we are using
the shorthand u'(c)
consumption and u"(c) = " = dư ( to be the second derivative of the utility function
(which is also the derivative of the first derivative of the utility function).
du(c) for the first derivative of the utility function with respect to
dc
du(c)
dc2
du' (c)
dc
Transcribed Image Text:Consider the lottery that assigns a probability T of obtaining a level of consumption CH and a probability 1-T of obtaining a low level of consumption c, with CH > C1. Consider an individual facing such a lottery with utility function u(c) that has the properties that more is better (that is, a strictly positive marginal utility of consumption at all levels of c) and diminishing marginal utility of consumption, u"(c) < 0. As usual, we are using the shorthand u'(c) consumption and u"(c) = " = dư ( to be the second derivative of the utility function (which is also the derivative of the first derivative of the utility function). du(c) for the first derivative of the utility function with respect to dc du(c) dc2 du' (c) dc
Using the definition of the certainty equivalent level of consumption provide an
expression for the ratio, "(Cee)-u(cL)
u(CH)-u(cL)'
Transcribed Image Text:Using the definition of the certainty equivalent level of consumption provide an expression for the ratio, "(Cee)-u(cL) u(CH)-u(cL)'
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