Question: =+B. Suppose that, as in exercise 17.10 the function u1x2 5 ln x allows us to represent our tastes over gambles as expected utilities. Assume

=+B. Suppose that, as in exercise 17.10 the function u1x2 5 ln x allows us to represent our tastes over gambles as expected utilities. Assume the same set-up as the one described in A.

a. Let p1 be defined as the price of $1 of consumption if state 1 occurs and let p2 be the price of $1 of consumption in the event that state 2 occurs. Set p2 5 1 and then denote the price of $1 of consumption in the event of state 1 occurring as p1 5 p and write down your budget constraint.

b. Solve the expected utility maximization problem given this budget constraint to get your demand x1 for state 1 consumption as well as your demand x2 for state 2 consumption.

c. Repeat

(a) and

(b) for me.

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