Microeconomic Theory II
Problem set on Uncertainty
Question 1
Sarah preference is described by utility U = W
1/2
, where W is here wealth level. She is
facing a possible loss of her car worth $1000 with probability 0.1. Suppose that an
insurance company will charge 11 cents per one dollar of insurance bought. Let her
initial wealth level be $10000. Will she buy any insurance and if so how much? Also,
depict your result on a diagram with statecontingent consumption as your axes.
Question 2
Connie’s utility depends upon her income. Her utility function is U=I
1/2
. She has
received a prize that depends on the roll of a pair of dice. If she rolls a 3, 4, 6 or 8, she
will receive $400. Otherwise she will receive $100.
a)
What is the expected payoff from this prize? [ The probability of rolling a 3 is
1/18, the probability of rolling a 4 is 3/36, the probability of rolling a 6 is 5/36,
and the probability of rolling an 8 is 5/36]
b)
What is the expected utility from this prize?
c)
This is the end of the preview. Sign up
to
access the rest of the document.
This note was uploaded on 03/14/2010 for the course ECON microecono taught by Professor Yy during the Spring '10 term at Seoul National.
 Spring '10
 YY
 Microeconomics, Utility

Click to edit the document details