Draw Alfonsos budget line in a contingent consumption (CC) diagram. (b) Suppose Alfonso is risk averse with
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Question:
Draw Alfonsoís budget line in a contingent consumption (CC)
diagram.
(b) Suppose Alfonso is risk averse with utility-of-money function
v (c) = ln (c). Suppose further that Alfonso has probability 1
4 of
being audited irrespective of how much income he declares.
(i) Find Alfonsoís optimal contingent consumption bundle (i.e.,
the point on his budget line where the budget line is tangent
to an indi§erence curve).
(ii) What value of z achieves this optimal contingent consump-
tion?
(iii) Illustrate your results from (i) and (ii) in a CC diagram. (You
may add the information to your diagram from (a) or draw a
fresh diagram.)
Related Book For
Microeconomics An Intuitive Approach with Calculus
ISBN: 978-0538453257
1st edition
Authors: Thomas Nechyba
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