Assume Brandon's benefit function for water is S(W)= √W and he consumes water both in droughts,W_D,or in the rainy season,W_R.Assume his current consumption bundle is W_D = 400 and W_R = 100 and the probability of drought is 0.75.Brandon's certainty equivalent is: A) 250 units of water. B) 306.25 units of water. C) 18.75 units of water. D) 17.5 units of water.

Question

Quizplus · Accepted Answer

The expected utility of Brandon is: EU = 0.75*√400 + 0.25*√100 = 15 + 5 = 20 The certainty equivalent is the amount of water that would give Brandon the same level of utility as the expected utility. To find the certainty equivalent, we can solve the following equation: √W = 20 W = 20^2 W = 400 Therefore, the certainty equivalent is 400 units of water, which is equal to Brandon's current consumption bundle in the drought season. So, his best choice is to stick with his current consumption bundle W_D.

Assume Brandon's Benefit Function for Water Is S(W)= √W and He