ec142f09hw4

ec142f09hw4 - Kata Bognar kbognar@ucla.edu Economics 142...

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Kata Bognar kbognar@ucla.edu Economics 142 Probabilistic Microeconomics UCLA Fall 2009 Homework Assignment 4. Due date: December 2, 2008 1. (Arbitrage.) Dr. Andrei Smyslov is a risk averse expected utility maximizer. The [6] following three assets are available for him. price payoff in state 1 payoff in state 2 asset A 100 50 200 asset B 40 80 20 asset C 20 30 30 These assets can be bought or sold in any amounts, even partial units. (a) Point out an arbitrage opportunity for Dr. Smyslov. (b) Suggest a change in the the asset prices that eliminates the arbitrage op- portunity above. (c) Assume that Dr. Smyslov is a risk lover. Point out an arbitrage opportunity in this case and propose a price change that eliminates it. Is your answer different from the one before? 2. (Efficient risk-sharing.) Dr. Dave Bowman and HAL are expected utility max- [10] imizers. Dr. Bowman’s vNM utility is u ( x ) = log(2 x ) while HAL’s vNM utility is v ( x ) = x. Dr. Bowman and HAL participate in a space mission. If the mission
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This note was uploaded on 01/25/2010 for the course ECON ECON 142 taught by Professor Bognar during the Fall '09 term at UCLA.

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ec142f09hw4 - Kata Bognar kbognar@ucla.edu Economics 142...

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