2101 ECONOMICS MICROECONOMICS 2 (Pass) 2009 TUTORIAL 5: Questions for WEEK 6 Starting March 30
NOTE: It is expected that the exam taken this past Tuesday will be returned and gone over in tutorial in Week 6 so be sure to attend your tutorial section. For group presentations and unless specified otherwise by your tutor, present either Question 1 or 2 below but not Question 3.
1. Consider three individuals: Al, who is risk averse; Larry, who is risk loving; and Ned, who is risk neutral. They each have $1,000 . A wager of $500 allows any of the three to bet on a coin toss. If a head appears, the bet pays $1,500 or a net gain of $1,000 . If a tail appears, the bet pays nothing. Heads or tails are equally likely. For each individual, explain whether he will choose to wager $500 or not at all.
2. The following question is taken from Discussion Question 6.9 on p. 194 of your textbook: Bens If house burns down, he loses everything (his consumption is zero). Assume that Bens indifference curves between consumption if there is no fire and consumption if there is a fire are L shaped with the vertices along the 45 line. Prove that Ben will fully insure even if the premium for fire insurance is unfair. How would you characterize Bens preferences for risk taking? Note: The L shaped indifference curves introduced in this question are one extreme of capturing preferences toward risk and useful to discuss for pedago...