This preview shows pages 1–2. Sign up to view the full content.
Cornell University
Economics 3130
Problem Set 9 Solutions
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. All credit is based on
the explanation.
(a) If insurance is not actuarially fair, a riskaverse consumer will purchase no insur
ance.
1. Andy is seen to place an evenmoney $100,000 bet on Cornell to beat the 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: “Evenmoney”
means that Andy gets double the bet if Cornell wins and zero if we lose.)
The states of nature are: 1) Cornell wins and 2) Cornell loses. He must believe they
will win with a probability of at least 51.3%. Solve this by requiring that the expected
utility of taking the bet is greater than the expected utility of not taking the bet. In
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview. Sign up
to
access the rest of the document.
 Spring '06
 MASSON
 Economics, Microeconomics

Click to edit the document details