Fall 2007 - Newhouse's Class - Exam 1

Fall 2007 - Newhouse's Class - Exam 1 - Economics 171:...

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Economics 171: Decisions Under Uncertainty Midterm 1 – Solutions 1. (12 pts) Imagine that you’re preparing for an Economics exam next week. The exam will either be straight-forward or challenging. If you don’t study you’ll receive a D if the exam is straight-forward and you’ll receive an F if the exam is challenging. If you study moderately you’ll receive a B if the exam is straight- forward and a C if it’s challenging. If you study hard you’ll receive an A regardless of the difficulty of the exam. a. What actions are available to you? {Don’t study, Study moderately, Study hard} b. What states of nature could occur? {Straight-forward exam, Challenging exam} c. What are the possible outcomes? {A, B, C, D, F} 2. (20 pts) Sarah is considering which occupation to pursue. Her salary will depend on her choice of occupation and the overall state of the economy as shown below. The probability for each possible state of the economy is also given. Overall State of Economy Recession ( p = 0.2) Normal ( p = 0.5) Boom ( p = 0.3) Actuary $35,000 $35,000 $40,000 Occupation Realtor $15,000 $35,000 $70,000 a. Which occupation will she choose according to the maximax criterion? Realtor – Max payoff for Realtor = $70,000 > Max payoff for Actuary = $40,000 b. Which occupation will she choose according to the maximin criterion? Actuary – Min payoff for Actuary = $35,000 > Min payoff for Realtor = $15,000 c. Which occupation will she choose if she maximizes her expected salary?
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This note was uploaded on 04/23/2008 for the course ECON 171 taught by Professor Newhouse during the Fall '07 term at UCSD.

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Fall 2007 - Newhouse's Class - Exam 1 - Economics 171:...

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