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

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
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.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

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.

Page1 / 2

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

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online