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Ecological Economics Lecture 8 Tiago Domingos Assistant Professor Environment and Energy Section Department of Mechanical Engineering Doctoral Program and Advanced Degree in Sustainable Energy Systems Doctoral Program in Mechanical Engineering Doctoral Program in Environmental Engineering

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Discount Rate – Problem 4 Assuming that the utility discount rate and the elasticity remain constant, then the consumption discount rate increases (a) However, the elasticity is in general a function of consumption, and the only guaranteed property it has (for risk or inequality averse individuals) is that is positive. It may, for example, be decreasing with increasing consumption, which might counterbalance the effect of increasing consumption.

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Discount Rate – Problem 6 Expecting to be poorer in the future does not mean that ρ<0. Importance of clear distinction between utility discount rate and consumption discount rate Income or consumption have no relation with the utility discount rate

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Expected Utility Note that the expected utility function, is not a linear function of the two consumption levels, and so comprises many types of indifference curves besides perfect substitutes. The fact that expected utility is only “unique up to an affine transformation” and not “up to a monotonic transformation” implies that expected utility is cardinal and not ordinal. This also shows up in the fact that we are measuring consumption in money.

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Expected Utility - Problems 5 –There is no reason for the risk loving curve to have a downward sloping section. 6 –Note that the question is about “self-insurance”

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