Suppose there are two possible states of nature, good and bad, and a consumer has utility...

  

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Suppose there are two possible states of nature, good and bad, and a consumer has utility u(cg, c) = ln(c) + In(c). The consumer endowment is mg = 10 in the good state and m = 1 in the bad state, and they have access to an insurance with premium Y = 1. Therefore, if they buy an amount K of insurance, their budgets constraints are given by Answer the following questions Cg=mg-K = Comb K+K. (a) If we eliminate the variable K and rewrite the consumer's problem in terms of a contingent consumption plan, then Pb Pg = Pg and Pb are the prices of consumption in the good and bad states, respec- tively, in the consolidated budget constraint. Suppose there are two possible states of nature, good and bad, and a consumer has utility u(cg, c) = ln(c) + In(c). The consumer endowment is mg = 10 in the good state and m = 1 in the bad state, and they have access to an insurance with premium Y = 1. Therefore, if they buy an amount K of insurance, their budgets constraints are given by Answer the following questions Cg=mg-K = Comb K+K. (a) If we eliminate the variable K and rewrite the consumer's problem in terms of a contingent consumption plan, then Pb Pg = Pg and Pb are the prices of consumption in the good and bad states, respec- tively, in the consolidated budget constraint.