Consider the Consumption and Savings model with random future income. The utility function of the individual is: u(C0, C1) = (C0) + (C1)1/2, where C0 is present consumption expenditure and C1 is future consumption. Let the present income be $5, the interest rate in the financial market r = 5%, and the probability distribution of future income Y1 = (1, 2; 1/2 , 1/2). Calculate the expected utility of saving $0 (consume $5 in the present) (use two decimals)
Consider the Consumption and Savings model with random future income. The utility function of the individual is: u(C0, C1) = (C0) + (C1)1/2, where C0 is present consumption expenditure and C1 is future consumption. Let the present income be $5, the interest rate in the financial market r = 5%, and the probability distribution of future income Y1 = (1, 2; 1/2 , 1/2). Calculate the expected utility of saving $0 (consume $5 in the present) (use two decimals)
Chapter7: Uncertainty
Section: Chapter Questions
Problem 7.1P
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Consider the Consumption and Savings model with random future income. The utility function of the individual is: u(C0, C1) = (C0) + (C1)1/2, where C0 is present consumption expenditure and C1 is future consumption. Let the present income be $5, the interest rate in the financial market r = 5%, and the probability distribution of future income Y1 = (1, 2; 1/2 , 1/2).
Calculate the expected utility of saving $0 (consume $5 in the present) (use two decimals)
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