Econ808H2.02

# Econ808H2.02 - The Ohio State University Department of...

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The Ohio State University Department of Economics Econ 808–Problem Set #2 Due Tuesday, April 23 Spring 2002 Levin and Peck 1. Consider the following economy with one physical commodity per state of nature and three consumers, each of whom seek to maximize expected utility. For i = 1,2, consumer i is risk averse, with utility of certain consumption given by u i ( x i ) = log( x i ) . For i = 1,2, consumer i is endowed with 1 unit of consumption when she does not have an accident, 0 units of consumption when she has an accident. Consumer 1 is a “low risk” consumer, with a probability of an accident equal to 1/3. Consumer 2 is a “high risk” consumer, with a probability of an accident equal to 1 2 . Consumer 1 having an accident and consumer 2 having an accident are independent events. Consumer 3 is risk neutral, with utility of certain consumption given by u 3 ( x 3 )= x 3 , and has an endowment of 2 units of consumption in all states of nature. For parts (i) and (ii), assume that consumer 3 knows that consumer 1

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Econ808H2.02 - The Ohio State University Department of...

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