ec142f09hw2 - Kata Bognar [email protected] Economics 142...

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Unformatted text preview: Kata Bognar [email protected] Economics 142 Probabilistic Microeconomics UCLA Fall 2009 Homework Assignment 2. Due date: October 26, 2009 1. (Expected Utility Representation) Assume that there are two possible states of [10] nature, nuclear war or peace. Dr. Strangelove believes that nuclear war is three times as likely as peace. Denote x W the amount of money Dr. Stangelove has in case of war and x P the amount of money he has in case of peace. Dr. Strangelove is very strange, he strictly prefers ( x W ,x P ) to ( x W ,x P ) if x W > x W or if x W = x W and x P > x P . Is there an expected utility representation of Dr. Strangelove’s preferences? If yes, provide a vNM utility function, if no explain why not. 2. (Bayesian Updating) Soviet Premier Dmitry Kisov claims that his country has a [10] doomsday device which will automatically destroy all life on Earth if there is a nuclear strike in the Soviet Union. US President Merkin Muffley feels that Kisov may bluff and think that it is equally likely that the Soviets have or not have the...
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