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Unformatted text preview: 1 The previous analysis is illustrated in the graph: u 2. ANSWER We have the probability distribution over income and the preferences of the individual = 2 / 1 400 2 / 1 w/p 100 x and 2 / 1 ) x ( ) x ( u = a) The expected income is 250 ) 400 )( 2 / 1 ( ) 100 )( 2 / 1 ( ] x [ E = + = b) The expected utility is 15 ) 400 )( 2 / 1 ( ) 100 )( 2 / 1 ( )] x ( u [ E 2 / 1 2 / 1 = + = c) The certainty equivalence is the income with certainty which provides the same utility as the distribution, namely u(x CE ) = E[u(x)]. Therefore, we have (x CE ) 1/2 = 15 x CE = 225 10 25 x E B [u(x)] 50 75 100 E A [u(x)] 2 3 u d) The answers are illustrated in the graph: 20 10 100 x E[u(x)] 200 300 400 E[x]...
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This note was uploaded on 04/13/2008 for the course ECON 301 taught by Professor Castaneda during the Spring '08 term at Tulane.
 Spring '08
 Castaneda
 Microeconomics

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