ec142f09hw3 - Kata Bognar Economics 142...

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Kata Bognar Economics 142 Probabilistic Microeconomics UCLA Fall 2009 Homework Assignment 3. Due date: November 18, 2009 1. Georgie is an expected utility maximizer, he prefers more money to less money [6] and has risk averse preferences. Assume that the following two lotteries are available for him. The lottery A pays $50 , $80 and $100 with equal probabilities, while the lottery B pays $50 and $100 with equal probabilities. (a) Which of these lotteries would Georgie prefer? Please explain! (b) Can you be sure that the lottery A has higher certainty equivalent for Georgie than the lottery B ? 2. (Portfolio Choice) Pete is an expected utility maximizer and has $200 to invest. [10] His vNM utility function over money is u ( x ) = log x. He can invest in a risk-free asset; a unit of that asset costs $50 and pays $100 next year. Alternatively, he can invest in the stocks of the company operating the Korova Milk Bar. Currently, that stock costs $20 and, depending on the business done at the Bar, it may have
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ec142f09hw3 - Kata Bognar Economics 142...

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