100bmid1W10 Part 2 answers

100bmid1W10 Part 2 answers - Econ 100B (Grossman)Winter...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Econ 100B (Grossman)—Winter 2010 Midterm 1 January 26, 2010 Blue-book – 20 points (2 questions, 10 points each) 1. You rent a room with a nice ocean view in a house on Del Playa. Last week’s storms severely eroded the sea cliffs and your friend (the engineering major) estimates that there is a 50% chance that they will collapse and you will lose all of your possessions, valued at $100. You can sell off some of your belongings to buy some insurance against this risk, for the price of p dollars for every dollar of insurance. (a) Let c c denote your wealth if the cliffs collapse and c nc denote your wealth if they do not collapse. Write the equation of your state-contingent budget constraint, with c nc alone on the left-hand side of the equation. answer: c nc = 100 - p 1 - p c c (b) If your utility of wealth is given by u ( c ) = c , what is your MRS ? (Express your answer as if c nc is on the y -axis.) answer: MRS = - c nc c c (c) Write down a condition that characterizes the optimal consumption bundle, i.e. that you could
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 03/17/2010 for the course ECON 100B taught by Professor Kilenthong during the Spring '08 term at UCSB.

Page1 / 2

100bmid1W10 Part 2 answers - Econ 100B (Grossman)Winter...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online