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Econ212 MidTerm 2
Multiple Choice (30 points total 5 points each)
Identify the choice that best completes the statement or answers the question.
____
1.
Albert’s utility function is U(c) =
c
1/2
; his expected utility function is
pc
1/2
1
+ (1 
p
)
c
1/2
2
, where
p
is the probability that he
consumes
c
1
and 1 
p
is the probability that he consumes
c
2
. Albert is offered a choice between getting a sure payment of
$Z or a lottery in which he receives $400 with probability .30 or $2,500 with probability .70. Albert will choose the sure
payment if
a.
Z > 2,090.50 and the lottery if Z < 2,090.50.
b.
Z > 1,040.50 and the lottery if Z < 1,040.50.
c.
Z > 2,500 and the lottery if Z < 2,500.
d.
Z > 1,681 and the lottery if Z < 1,681.
e.
Z > 1,870 and the lottery if Z < 1,870.
____
2.
Sally is a risk averse person and Joe is a risk loving person.
The local grocery store offers a lottery ticket for 10 dolloars.
The lottery buyer will win with a 10% probability and lose with 90% probability.
If she wins, she will get 100 dollars
back and if she loses she gets nothing.
a.
Sally will buy the lottery ticket.
c.
Both Sally and Joe will buy the lottery ticket.
b.
Joe will buy the lottery ticket.
d.
Neither Sally nor Joe will buy the lottery tick
et.
____
3.
The demand function is described by the equation
q
(
p
) = 30

p
/3. The inverse demand function is described by the equa
tion
a.
q
(
p
) = 30

3
p
.
b.
p
(
q
) = 90

3
q
.
c.
q
(
p
) = 1/(30

p
/3).
d.
p
(
q
) = 1/30

q
/3.
e.
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 Spring '08
 Yu
 Utility

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