Suppose the taxpayer is an expected utility maximizer with strictly increasing Bernoulli utility function u(W), where W is final wealth. Write down the corre-sponding maximization problem.

Probability

Suppose the taxpayer is an expected utility maximizer with strictly increasing Bernoulli utility function u(W), where W is final wealth. Write down the corre-sponding maximization problem.

Characterize the optimal solution, x*, to the maximization problem in b. Be careful with both bounds, 0 and y.

Provide a condition under which x = 0 is a solution. What can you say about the role played by the probability 7r in this condition?

Provide a condition under which x = y is a solution. What can you say about the role played by the probability it in this condition?