Multiple Choice
Identify the choice that best completes the statement or answers the question.
____
1.
Sally Kink is an expected utility maximizer with utility function
pu
(
c
1
) + (1 -
p
)
u
(
c
2
), where for any
x
< 1,000, u(
x
) = 2
x
, and for
x
greater than or equal to 1,000,
u
(
x
) = 2,000 +
x
.
a.
Sally will be risk averse if her income is less than $1,000 but risk loving if her in-
come is more than $1,000.
b.
Sally will never take a bet if there is a chance that it leaves her with wealth less
than $2,000.
c.
Sally will be risk neutral if her income is less than $1,000 and risk averse if her in-
come is more than $1,000.
d.
For bets that involve no chance of her wealth exceeding $1,000, Sally will take any
bet that has a positive expected net payoff.
e.
None of the above.
____
2.
(See Problem 11.) Jonas’s 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
. Jonas is offered a choice
between getting a sure payment of $Z or a lottery in which he receives $3,600 with probability .10 or
$6,400 with probability .90. Jonas will choose the sure payment if
a.
Z > 6,084 and the lottery if Z < 6,084.
b.
Z > 4,842 and the lottery if Z < 4,842.
c.
Z > 6,400 and the lottery if Z < 6,400.
d.
Z > 6,242 and the lottery if Z < 6,242.
e.
Z > 6,120 and the lottery if Z < 6,120.
____
3.
Sir Plus has a demand function for mead that is given by the equation
D
(
p
) = 100 -
p
. If the price of
mead is $95, how much is Sir Plus’s net consumer’s surplus?
a.
12.50
b.
6.25
c.
25
d.
5
e.
9,500
____
4.
The demand function for drangles is given by
D
(
p
) = (
p
+ 1)
-2
. If the price of drangles is $4, then the
price elasticity of demand is
a.
-0.80.
b.
-6.40.
c.
-3.20.
d.
-4.80.
e.
-1.60.
____
5.
The demand for football tickets at each game is 160,000 - 12,000
p
. If the capacity of the stadium is
90,000 seats, what is the revenue-maximizing price for the owner of the stadium
to charge per tick-
et?
a.