Understand the role of inequality, let us abstract from leisure and just consider consumption. The idea here is that a country with higher inequality will be "riskier" to live in for an average citizen if this citizen is rich with some probability and poor with some other probability. So suppose that there are only two levels of consumption in each country and that the ratio of the high to the low consumption level is 5 in country 1 and 10 in country 2. Moreover, suppose that you become poor or rich as a result of an even coin flip; i.e., half the population is rich and half is poor in each country. Using the data on average consumption per capita above, and the information here, in which country would you prefer to live? Hint: To answer this question you need to calculate expected utility

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Expected utility hypothesis Foundational assumption in mathematical economics concerning decision ma... View the full answer