Chris maximizes discounted utility = U (co, C₁, C₂) = co + 8c₁ +8²c₂ for d 0.8. Which of the following consumption streams will he choose? (Hint: there is no need to compute the utility function for each option. Just look at the tradeoffs between the immediate consumption and the future consumption.) O O Co = C1 = C2 = 10 Co = 5, C₁ = 15, C₂ = 10 Co = 5, C₁ = 10, C₂ = 15 Co = 9, C₁ = 10, C₂ = 12

Chris maximizes discounted utility = U (co, C₁, C₂) = co + 8c₁ +8²c₂ for d 0.8. Which of the following consumption streams will he choose? (Hint: there is no need to compute the utility function for each option. Just look at the tradeoffs between the immediate consumption and the future consumption.) O O Co = C1 = C2 = 10 Co = 5, C₁ = 15, C₂ = 10 Co = 5, C₁ = 10, C₂ = 15 Co = 9, C₁ = 10, C₂ = 12

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.11P

See similar textbooks

Similar questions

Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. Suppose that Shelly's preferences for consumption and leisure can be expressed as u(c ,l)=(c-300) (l-60). a) Calculate her utility, u0 , if she consumes c = $1000 and enjoys l = 110 hours of leisure per week. b) Evaluate her marginal utilities of consumption and leisure at this point and use them to determine the slope of her indifference curve at this point. [Hint:Using calculus, it can be shown that for any given level of utility u, MUc = l - 60 and that MUl = c - 300.] c) Marginal utilities are important because they can be used to calculate the change in utility, ∆u, that results from changing c and l by the small amounts ∆c and ∆l. The induced change in utility is approximately (≈): ∆u ≈ MUl ∆l + MUc ∆c. Based on your answers for (b), what happens to her utility if her consumption increases by ∆c = $2 and her leisure declines by ∆l = 1 hour? d)…
It is October and Sam has won a price of $9000. She has the following two options:• Option A: receiving the entire amount in October;• Option B: receiving the price in three equal installment, that is, receiving $3000 in eachof the following months (October, November, December).Sam decides to distribute her price over time by choosing Option B. Assume that Sam hasconstant marginal utility of money. Prove mathematically that Sam’s preference for Option B cannot be explained by hy-perbolic discounting (the β − δ model). Assume 0 < δ < 1 and 0 < β ≤ 1.
Suppose a consumer has S100 today and he tells you he is willing to wait X amount of time for another $50. The same consumer also tells you that in the future if he has $10 he ts willng to wait Y amount of time for another $50.If Y is greater than X, does the individual exhibit hyperbolic discounting, exponential discounting, or is there not enough information to determine? Briely explain your answer.
The Minister of Transport released its Festive season road accident statistics which shows that the probability of drivers committing an accident is 8% with utility , where H standsfor year income.The Minister further claims these Festive season road accidents cost the state (in terms of claims lodged) an average of R84 000 per annum. The Road Accident Fund is an insurance scheme providing compulsory indemnity cover to victims of vehicle accidents and taxi drivers. (a) Suppose that an average commuter earns R84 000 per annum. What is the expected utility of each commuter if the driver decides not to take insurance. (b) What is the cost of insurance policy to the Road Accident Fund? (c) Due to high accident rates in South Africa during the Festive season, the Road AccidentFund has issued a warning to government that the fund will be insolvent soon. Advise the Minister on the cost of insurance that can collapse the scheme. please answer a,b,c
Betty is looking for a job. She considers job opportunities intwo cities. Bettyís utility is given by y- x, where y is the lifetime income andx is the amount spent on buying a house. The income from City 1 fluctuatesalthough the house price is stable. On the contrary, the income from City2 is stable while the house price fluctuates. If she moves to City 1, Bettycan earn a lifetime income y1 with probability alpha and 1 + y1 with probability1-alpha . The house price in City 1 is x1. Moving to City 2 means that Bettycan earn an income of y2. However, the house price is x2 with probabilitygamma and 1 + x2 with probability 1-gamma . Do the following: (a) Write down theexpected utilities associated with living in the two respective cities, i.e., V1and V2. (b) Derive the condition under which Betty chooses City 1.
Jason Stilton is the chief executive officer of RightLiving a company that buys life insurance policies at a discount from terminally ill persons and sells the policies to investors for 85% of the value of the future benefit. The patients recieve the cash to use for medical and other expenses and the investors are guaranteed a positive return on thier investment. The diffreance between the purchace and sale prices is the RightLivinf Profit. Stilton is aware that some sick patients may obtain insurance policies through fraud (Not revealing thier illness on the insurance application). An insurance company that discovers such will cancel the policy and refuse to pay. Stilton beleives that most of the policies he has purchased are legitimate, but he knows some are probably not. Question Using IDDR approch, discuss the decision process Stilton should use in deciding whether to disclose the risk of fraudulent policies to potential investors.
Explain how Hick's Paradox challenges the traditional assumption of monotonicity in consumer preferences and its implications for welfare economics.
Given the Utility Function is U = X0.7Y0.3 and Budget is taka 300. The original price was (Px, Py) = (2, 2) and the new price is (Px’, Py) = (4, 2). (a) Draw an angle curve for X by using the above information [Labelling is must] (b) Calculate the value of Compensation variation (CV) and Equivalent variation (EV)?
Suppose that a consumer has a choicebetween two goods, X and Y. If the price of X is $2 and the priceof Y is $3, how much of X and Y does the consumer purchaseper period, given an income of $17 per period? Use the followinginformation about marginal utility:Units MUX MUY1 10 52 8 43 2 34 2 25 1 2
The economy is populated by 100 agents. Each agent has to divide 1 unit of timebetween work and leisure given the wage rate w paid on the labor market. In additionto the salary, he or she also receives dividend a income of π = Π/100 (the total profitof the firms Π is distributed equally among all the consumers in form of dividends)Suppose that the government does not incur expenditures, so G=0.The agent’s utility function depends on consumption (c) and leisure (l), and it is assumedto satisfy u(c, l) = 0.5 ln(c) + 0.5 ln(l). On the other side of the market, there arefirms who hire workers and produce output. The representative firm operates witha Cobb-Douglas production technology Y = zK^0.5N^0.5, where z denotes the totalfactor productivity, and K = 100 is a fixed amount of capital. Each of the firm’semployees receives wage w, i.e. the total labor cost of the firm is equal to wN^dSuppose that initially z = 1 (so the competitive equilibrium is the one we calculatedin class), but the…
You have the following observations about a consumer's purchase choices of two commodities, 1 and 2: When the prices were ($3,$6) consumer purchases bundle A = (2, 5). When the prices were ($7, $3) consumer purchases bundle C = (3, 5) You did not observe when consumer purchases Bundle B = (4, 4) . a. Compute the cost of each bundle A, B, C given each price pair. Then determine how the consumer ranks the bundles using Directly Revealed Preferred (DRP) relation. b. What can you say about the bundles using Indirectly Revealed Preferreu (IRP) relation?
Wherein:TU = Total Utilityf= is a function ofMU = Marginal UtilityO = units of consumptionA= infinitesimal change EMV= Expected Monetary Value