f08econ142hw4

f08econ142hw4 - Kata Bognar kbognar@umich.edu Economics 142...

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Kata Bognar kbognar@umich.edu Economics 142 Probabilistic Microeconomics UCLA Fall 2008 Homework Assignment 4. Due date: December 4, 2008 1. ‘At the southernmost point of the United States are the Florida Keys, a string of [20] small islands held together by a concrete causeway.’ Two of these remote coral islands are Key Largo and Key West. Both islands have 50 inhabitants. Each year, early fall a hurricane passes by the area hitting one or the other island with equal probability and destroying 75% of the wealth on that (but not on the other) island. Suppose that every habitant of Key Largo has $10 , 000 from last year tourism. Then, if the hurricane hits Key Largo each habitant looses $7 , 500 . Similarly, suppose that every habitant of Key West has $10 , 000 and if the hurricane hits Key West each habitant looses $7 , 500 . The habitants of the Keys are expected utility maximizers with vNM utility function u ( x ) = x. (a) What are the relevant states of nature in this situation?
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