compute the EDU

Example: Stock vs. Bond - T=1 - DM has 200 apples at t=0 - DM chooses between stock or bond at t=0, each of which costs 100 apples - Bond pays 110 apples at t=1 - Stock pays 70/120 apples at t=1 in recession/boom S={r,b} (where r/b stands for "recession"/"boom"). Buying bond corresponds to c=(c0,c1), where: c0(r)=100c0(b)=100c1(r)=110c1(b)=110 Buying stock corresponds to c^=(c^0,c^1), where: c^0(r)=100c^0(b)=100c^1(r)=70c^1(b)=120 DM forms (subjective) belief that assigns a probability to each state ( (s) is probability of s ) DM chooses c with highest EDU: E(u(c0)+u(c1)+2u(c2)++u(cT)), where - expectation is computed based on ; - u is DM's so-called utility function (although not quite right, as first pass think of utility as happiness DM gets from consumption); - (01) is DM's so-called discount factor (which captures her impatience). Suppose (r)=0.4,(b)=0.6,u(ct)=ln(ct),=0.9. Compute the EDU of c and c^. Example: Stock vs. Bond - T=1 - DM has 200 apples at t=0 - DM chooses between stock or bond at t=0, each of which costs 100 apples - Bond pays 110 apples at t=1 - Stock pays 70/120 apples at t=1 in recession/boom S={r,b} (where r/b stands for "recession"/"boom"). Buying bond corresponds to c=(c0,c1), where: c0(r)=100c0(b)=100c1(r)=110c1(b)=110 Buying stock corresponds to c^=(c^0,c^1), where: c^0(r)=100c^0(b)=100c^1(r)=70c^1(b)=120 DM forms (subjective) belief that assigns a probability to each state ( (s) is probability of s ) DM chooses c with highest EDU: E(u(c0)+u(c1)+2u(c2)++u(cT)), where - expectation is computed based on ; - u is DM's so-called utility function (although not quite right, as first pass think of utility as happiness DM gets from consumption); - (01) is DM's so-called discount factor (which captures her impatience). Suppose (r)=0.4,(b)=0.6,u(ct)=ln(ct),=0.9. Compute the EDU of c and c^