
Precautionary saving and prudence The Query to Example 17.2 asks how uncertainty about the future might affect a person's savings decisions. In this problem we explore this question more fully. All of our analysis is based on the simple two-period model in Example 17.1.
a. To simplify matters, assume that
b. Use Jensen's inequality (see Chapters 2 and 7 ) to show that this person will opt for
c. Kimball" suggests using the term "prudence" to describe a person whose utility function is characterized by
d. In Example 17.2 we showed that real interest rates in the U.S. economy seem too low to reconcile actual consumption growth rates with evidence on individuals willingness to experience consumption fluctuations. If consumption growth rates were uncertain, would this explain or exacerbate the paradox?

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Chapter 17 Solutions
EBK MICROECONOMIC THEORY: BASIC PRINCIP
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