# ps8 - Economics 101A Problem Set N umber 8 DU E: Tuesday D...

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Economics 101A Problem Set Number 8 DUE: Tuesday December 2 Note: Some of these problems take a little longer time. Plan ahead and don’t leave the problem set to the last minute! 1. Suppose that the following contracts are available: -contract G pays \$1 if the SF Giants win the World Series, and 0 otherwise -contract O pays \$1 if Oakland A’s win the World Series, and 0 otherwise -contract X pays \$1 if any other team (except SF or Oakland) wins, and 0 otherwise You can buy any number of each of these contracts for prices p G , p O , and p X , respectively. For example, if you buy 10 G contracts and the Giants win, you get \$10 next fall. (a) Suppose p G =0.3 and p O =0.3. What must be true about p X ? Why? (b) Suppose that in the East Bay only O contracts are available. Suppose that a Berkeley student has \$y, which she can either invest in cash or O contracts. Let B O represent the probability that she places on the event of the A’s winning. If she buys x contracts, she has: y + x - xp O in the fall if the A’s win y - xp O in the fall if the A’s lose. Find the first order condition for the optimal choice of x.

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## This note was uploaded on 04/01/2009 for the course ECON 101a taught by Professor Staff during the Fall '08 term at University of California, Berkeley.

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ps8 - Economics 101A Problem Set N umber 8 DU E: Tuesday D...

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