Question: Suppose an individual facing the following problem: The utility function takes the form: max C1,C2,81 U = E[u(c) + Bu(c)], u(c): == 1 -ac

Suppose an individual facing the following problem: The utility function takes the form: max C1,C2,81 U =

Suppose an individual facing the following problem: The utility function takes the form: max C1,C2,81 U = E[u(c) + Bu(c)], u(c): == 1 -ac -e- a The individual only works and gets income in the second period. The budget constraint is given by: C + s = 0, C = y + (1+r)s. a. Find the optimal c, c. b. Suppose there is uncertainty regarding the interest rate, which can take on two possible values: h or r, each with equal probability. It is known that r is greater than rh, and the average interest rate is given by rh+= = r. Find the optimal c.

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