8 Indifference Curves with E-Z Preferences
For the simple model examined in subsection 2.6 of Section 2, the certainty equivalent is:
(C.1)
and the welfare function is:
(C.2)
with:
(C.3)
(C.4)
(C.5)
Consider variations in τ2H and τ1H which leave WE-Z unchanged:
(C.6)
(C.7)
(C.8)
with:
(C.9)
where:
(C.10)
(C.11)
Then:
(C.12)
This may be compared with the result using the basic iso-elastic welfare function, given in subsection 2.5 above.
