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Unformatted text preview: EC 206 Microeconomics II First Midterm Exam February 28, 2007 Professor Glenn C. Loury Instructions. Please answser each of the three questions below. Use a separate blue book for each question. Be sure to put your name, ID #, and the question # on each blue book. These questions may be answered using graphs and words, as well as equations. You do not need to show every details of a calculation as long as you get the right answer and your thought process is clear. Good luck! 1. { 25 points } An expected utility maximizing agent must choose between two feasible courses of action, a { a ,a 1 } . The return from this choice depends on which of two possible consequences occurs, c { c 1 ,c 2 } . Let u ( a,c ) be the agents return if action a is taken and consequence c occurs. Let p (0 , 1) be the probability that c 1 occurs. (a) Prove that the agents maximal payoff in this choice situation must be a convex function of the probability, p . [10 pts] (b) What is the economic significance of this fact? [5 pts] (c) Explain as fully as you can why this fact must be true even if there are more than two feasible...
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 Spring '07
 G.LOURY
 Microeconomics

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