Table of Contents

## What is state contingent consumption?

Contingent consumption. 1. what consumption or wealth you will get in each possible outcome of some random event. 2. example: rain or shine, car is wrecked or not, etc.

### What is contingent consumption plan?

Contingent consumption plan: an insurance company will pay for the cost if an accident happens.

#### What is state contingent budget constraint?

State-contingent budget constraints. Definitions. A contract is state contingent if it is implemented only when a particular state of Nature occurs. A state-contingent consumption plan specifies the consumption to be implemented when each state of Nature occurs.

**What is consumption under certainty?**

Under certainty, the DM’s consumption level is ¯s. The theorem states that if the peer’s consumption level is then the consumption level which provides maximum utility for the DM is strictly greater than ¯s.

**What is expected utility function?**

“Expected utility” is an economic term summarizing the utility that an entity or aggregate economy is expected to reach under any number of circumstances. The expected utility is calculated by taking the weighted average of all possible outcomes under certain circumstances.

## What is Friedman Savage hypothesis?

The Friedman–Savage utility function is the utility function postulated in the theory that Milton Friedman and Leonard J. Savage put forth in their 1948 paper. They argued that the curvature of an individual’s utility function differs based upon the amount of wealth the individual has.

### What is the consumption puzzle?

According to Friedman, the solution to the consumption puzzle was that according to Permanent Income Hypothesis (where consumption depends only on the permanent income of the consumer). APC depends only on the ratio of permanent income to current income.

#### What is standard utility theory?

Expected utility theory is a theory about how to make optimal decisions under a given probability of risk. It has a normative interpretation which economists used to think applies in all situations to rational agents but now tend to regard as a useful and insightful first order approximation.

**How do you calculate expected utilities?**

You calculate expected utility using the same general formula that you use to calculate expected value. Instead of multiplying probabilities and dollar amounts, you multiply probabilities and utility amounts. That is, the expected utility (EU) of a gamble equals probability x amount of utiles.

**What is a von Neumann Morgenstern expected utility function?**

von Neumann–Morgenstern utility function, an extension of the theory of consumer preferences that incorporates a theory of behaviour toward risk variance. It was put forth by John von Neumann and Oskar Morgenstern in Theory of Games and Economic Behavior (1944) and arises from the expected utility hypothesis.

## What is drift theory of consumption?

Those who expect higher future earnings tend to reduce their savings or even borrow to increase their present consumption. The consumption drift theory is explained in Fig. 3 where CL is the long-run consumption function which shows the proportional relationship between consumption and income as we move along it.