hw2 - Kata Bognar [email protected] Economics 142...

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Kata Bognar [email protected] Economics 142 Probabilistic Microeconomics UCLA Fall 2008 Homework Assignment 2. Due date: October 28, 2008 1. (Value of Information) General Sternwood is blackmailed. The threat can be either real or just a bluff. The General does not know this for sure but he believes that the threat is real with probability 1 / 4. The General has a total wealth of 250,000 dollars and the blackmailer is asking for 90,000 dollars. If he decides not to pay and the threat was real then he loses all his wealth. If he decides not to pay and the threat was a bluff then he has no loss at all. The General’s vNM utility is u ( x ) = x. Should General Sternwood pay the blackmailer? [2] The General figures the answer to the previous question himself but he is quite unhappy with it. Therefore he hires Philip Marlowe to find out some information about the case. Marlowe is a pretty good detective and if the blackmailing is a bluff he finds that out. However, he fails to recognize 1 in 3 real threats. (Clearly, there are no movies about those cases, however General Sternwood knows this.)
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