Consider the lottery that assigns a probability T of obtaining a level of consumption CHand a probability 1-T of obtaining a low level of consumption c, with CH > C1. Consideran individual facing such a lottery with utility function u(c) that has the properties thatmore is better (that is, a strictly positive marginal utility of consumption at all levels ofc) and diminishing marginal utility of consumption, u"(c) < 0. As usual, we are usingthe 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 todcdu(c)dc2du' (c)dc Using the definition of the certainty equivalent level of consumption provide anexpression for the ratio, "(Cee)-u(cL)u(CH)-u(cL)'

Sometimes the prices, income and other variables are not known with certainty. Rather there is a…

Answered: Using the definition of the certainty…

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

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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