Consider a two-period expected utility maximization problem with quadratic utility: 4 [ - 1/ (0 - 2 + 1)²] (T max_U = − 12 (ē − c₂)² + ßE₁ s.t. Ct + at = Yt Ct+1 = Yt+1 + (1+r) at where is constant. Assume 3 = 1 and r=0 for simplicity. First period income, yt, is certain and equals y: Yt = y Second period income, yt+1, will be equal to either y + e or y-e with equal probability of 3t+1=y+e with probability 1/2 y-e with probability 1/2 -ÏN

Consider a two-period expected utility maximization problem with quadratic utility: 4 [ - 1/ (0 - 2 + 1)²] (T max_U = − 12 (ē − c₂)² + ßE₁ s.t. Ct + at = Yt Ct+1 = Yt+1 + (1+r) at where is constant. Assume 3 = 1 and r=0 for simplicity. First period income, yt, is certain and equals y: Yt = y Second period income, yt+1, will be equal to either y + e or y-e with equal probability of 3t+1=y+e with probability 1/2 y-e with probability 1/2 -ÏN

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.11P

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