State-Contingent Budget Constraints Buy $K of accident insurance Cna = m-yK Ca=m4L-yK+K=m-L+(1-Y) K SoK(Ca-m+L)(1-Y And Cna =m-y(ca-m+ L/(1-y) Le m-y y na 1-y a
State-Contingent Budget Constraints Buy $K of accident insurance. Cna = m - K. Ca = m - L - K + K = m - L + (1- )K. So K = (Ca - m + L)/(1- ) And Cna = m - (Ca - m + L)/(1- ) I.e. C m L na = Ca − − − − 1 1
State-Contingent Budget Constraints m- y ni na 1-y1-y a The endowment bundle L m-A
State-Contingent Budget Constraints Cna Ca m The endowment bundle. m −L C m L na = Ca − − − − 1 1 m − L
State-Contingent Budget Constraints m- y ni na 1-y1-y a The endowment bundle slope L m-A
State-Contingent Budget Constraints Cna Ca m The endowment bundle. slope = − − 1 C m L na = Ca − − − − 1 1 m −L m − L
State-Contingent Budget Constraints m- y ni na 1-y1-y a The endowment bundle Where is the slope y most preferred state-contingent consumption plan? L m-A
State-Contingent Budget Constraints Cna Ca m The endowment bundle. Where is the most preferred state-contingent consumption plan? C m L na = Ca − − − − 1 1 slope = − − 1 m −L m − L
Preferences Under Uncertainty Think of a lottery. Win $90 with probability 1/2 and win sO with probability 1/2 U($90)=12,U($0)=2 Expected utility is
Preferences Under Uncertainty Think of a lottery. Win $90 with probability 1/2 and win $0 with probability 1/2. U($90) = 12, U($0) = 2. Expected utility is