198s2009.hw3.key

198s2009.hw3.key - Department of Economics, HKUST ECON 198...

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1 Department of Economics, HKUST ECON 198 Microeconomic Theory I Semester: Spring 2008/09 Tutor: Peter K. Tsui Office number: Room 2393 (ext.7597) Email: ecpeter@ust.hk Office hours: Wed 3:00p.m. – 5:00p.m. Homework #3 (Answer Key) Note: This answer key serves only as guidelines for grading. Giving the same answers as suggested below is no guarantee of full credits. 1.
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2 Variance(one trip) 36 ) 6 12 ( 5 . 0 ) 6 0 ( 5 . 0 2 2 = + = Variance(two trips) 18 ) 6 12 ( 25 . 0 ) 6 6 ( 5 . 0 ) 6 0 ( 25 . 0 2 2 2 = + + = Hence, strategy 2 is preferable because of the smaller variance. (c) Strategy 3: Three trips Outcomes 0 4 8 12 eggs Prob 1/8 3/8 3/8 1/8 Expect value = 12 8 1 8 8 3 4 8 3 0 8 1 × + × + × + × = 6 Variance(three trips) 5 . 7 ) 6 12 ( 8 1 ) 6 8 ( 8 3 ) 6 4 ( 8 3 ) 6 0 ( 8 1 2 2 2 2 = + + + = Yes. Suppose the individual is risk-averse, the smaller the variance, the higher the utility level he/she can achieve. If the gain in the expected utility by taking additional trip is less than the loss of utility due to the cost incurred, no additional trip should be taken. 2.
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This note was uploaded on 04/03/2010 for the course ECON ECON198 taught by Professor Leungsiufai during the Fall '09 term at HKUST.

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198s2009.hw3.key - Department of Economics, HKUST ECON 198...

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