Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Our utility function is u(m) = ln(m) and the budget constraint is gammamb + (1 - gamma)mg = gamma cb + (1 - gamma)cg,$ where

Our utility function is u(m) = ln(m) and the budget constraint is \gammamb + (1 - \gamma)mg = \gamma cb + (1 - \gamma)cg,$ where mg and mb is your income in the good and in the bad state, and cg and cb is your consumption in the good and in the bad state. insurance at a rate \gamma = 0.3

If you remain healthy (the "good state"), you will earn $80. If you get sick (the "bad state") you will earn only $5. Your probability of getting sick is 0.15.

Using the Lagrangean method how much consumption will a person choose in the good state, and how much in the bad state.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Managerial Economics

Authors: William F. Samuelson, Stephen G. Marks

8th edition

1118808940, 978-1119025900, 1119025907, 978-1119025924, 978-1118808948

More Books

Students also viewed these Economics questions