Question
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.
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