Suppose a Consumer's Expected Utility Function Given Two Possible States

question 40

Multiple Choice

Suppose a consumer's expected utility function given two possible states of nature A and B can be expressed in terms of consumption of food,F,in both states as U(F_A,F_B) = [0.6 × ln(F_A) ] + [0.4 × ln(F_B) ].For this utility function,MU_A is (0.6/F_A) and MU_B is (0.4/F_B) .Without insurance,the consumer can consume 200 in state A but only 50 in state B. The consumer can purchase insurance at a premium of 50 cents per dollar of benefit. Which of the following gives her budget line?

• A) F_A = 250 - F_B
• B) F_B = 250 - F_A
• C) F_A = 200 - F_B
• D) F_B = 50 - F_A

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Definitions:

Domestic Producers

Local manufacturers or producers who create goods and services within a country's borders, contributing to the domestic economy.

Foreign Producers

Companies or individuals that produce goods or services in a country other than the one where the goods or services are consumed.

Tariff Revenue

The income generated by the government from taxing imports.

International Trade

The exchange of goods and services across international borders or territories, involving importation and exportation.