Sep 28, 2017 term paper 2

GIVEN UTILITY FUNCTION U = -E -Y . A. SHOW THAT THE COINCIDENT OF ABSOLUTE RISK AVERSION R A (Y)=…

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Given utility function U = -e-Y.

a. Show that the coincident of absolute risk aversion RA(Y)= U”/U’ is constant (where U’ and U’’ denote the first and second derivative of U with respect to Y, respectively).

Show that U’ > 0 (positive marginal utility of income) and that U”

b. Show that the undeclared income, Y – X, is independent of Y for a consumer with this utility function.



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