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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