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Unformatted text preview: W3211 Spring 2009 Professor Vogel Recitation Week of 02/16/09 Joe&s utility function is given by U ( x;y ) = ( &x + y ) & , with < < & and < < 1 . Joe&s wealth is $ w > . 1. If the price of both x and y are $1 , what is Joe&s demand function for x and his demand function for y (as functions of his wealth)? 2. Substitute the demand curves you just solved for in Question #1 back into Joe&s utility function to solve for Joe&s utility as a function of his wealth. Using this equation, determine if Joe is risk averse, risk neutral, or risk seeking. To make life easier, in all that follows (i.e. all Questions after Question #2) let his initial wealth be zero. Now, suppose that Joe is a scientist who has just invented the widget. Monsanto wants to own the rights to produce widgets. Monsanto o/ers Joe two possible contracts. In the rst contract (contract 1), they o/er him $10 ; 000 in exchange for his patent. In the second contract (contract 2), they o/er him %5 of the revenue they earn...
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- Spring '08