# Economics 4.odt - a Hi Tharcisse The basics that are...

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a) Hi, Tharcisse: The basics that are supposed to be known before you attempt a problem are below: You have to know your theories other wise you won't know what theory you are supposed to use for a particular problem. This should be in your book or learning tools. First look at problem to decide what is used for this problem based on variables known or not known Expected utility theory is used for this problem since variables (numbers) are unknown utility maximum is written for this problem based on what is given in the problem Breaking down each letter below for the problem E[u,(w,-n u)] = E[u(w + )] subject to constraints E(u) is the sum of possibilities times probabilities. Example: 40% chance of earning \$2500/ month 60 % chance of \$1600/ month u(w) =w* (any exponent) Expected utility E(U) = P1U(W1) + P2U(W2) E(U) = 0.4(2500)0.5+ 0.6(1600)0.5 = 0.4(50) + 0.6(40) = 44 Expected utility is what you are looking for written this way: E(u) =p ,u (w - π u) + p ,u (w )- π u) p is probabilities n is possible events
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