ps9_09 - c s ) given by u ( c s ) = ln c s . (a) If there...

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Cornell University Economics 3130 Problem Set 9 Due 4/17/09 1. True/False/Explain. State whether each of the following is true or false, and explain why. Please limit your answers to no more than two sentences. (a) If insurance is not actuarially fair, a risk-averse consumer will purchase no insur- ance. 2. Andy is seen to place an even-money $100,000 bet on Cornell to beat Missouri in the first round of the NCAA tournament. If Andy’s utility is u ( y ) = y 0 . 5 and if his current wealth is $1,000,000, what must he believe the minimum probability that Cornell will win is? In your answer be sure to list the states of nature. (Note: “Even-money” means that Andy gets double the bet if Cornell wins and zero if we lose.) 3. Ms. Fogg is planning an around-the-world trip on which she plans to spend $10,000. The utility from the trip in any state s of the world is a function of how much she actually spends on it in that state (
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Unformatted text preview: c s ) given by u ( c s ) = ln c s . (a) If there is a 25 percent probability that Ms. Fogg will lose $1000 of her cash on the trip, what is the trips expected utility? What are the states of nature? (b) Suppose that Ms. Fogg can buy insurance against the loss at an actuarially fair rate. How much of the loss will she insure? Do the calculation. (c) What is the maximum amount Ms. Fogg would be willing to pay to insure her $1000? Relate this to the certainty equivalent. (d) Is there a price p for a dollar of insurance above which Ms. Fogg will choose to purchase zero insurance? If so, nd it. 4. In the following normal-form game, which strategy combinations survive iterated elim-ination of strictly dominated strategies? What are the pure strategy Nash equilibria of the game? Player 2 Player 1 L C R U 2,6 0,4 6,0 M 3,0 2,2 7,3 D 6,8 2,4 4,5 1...
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