198s2009.hw4

# 198s2009.hw4 - Department of Economics, HKUST ECON 198...

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1 Department of Economics, HKUST ECON 198 MICROECONOMIC THEORY I Semester: Spring 2009 Prof. S. F. Leung Lecture time: Mon & Wed 10:30am - 11:50am E-mail: [email protected] Teaching assistant: Peter TSUI (E-mail: [email protected], Office: 2393) Tutorial hour: Fri 5:00pm-5:50pm Tutorial room: 2502 Homework #4 Due in tutorial on Friday, May 15, 2009 1. Snyder and Nicholson, p. 228, Problem 7.8 2. Dr. Samuel Johnson said, “He is no wise man who will quit a certainty for an uncertainty.” Do you agree? Discuss. 3. Jack’s utility function is () UY Y = , where Y is income in dollars. He is considering two projects A and B with the following returns (measured in dollars): A B Return Probability Return Probability 100 0.5 100 0.1 60 0.1 60 0.4 20 0.2 20 0.5 0 0.2 0 0.0 (a) Calculate the means and variances of the returns from the two projects. Which project should Jack choose? (b) John’s utility function is UY EY Va rY =− , where a n d EY VarY are the mean and variance of Y , respectively. Which project should John choose?

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2 4. Jenny owns a house worth \$2,000,000. She cares only about her wealth, which consists entirely of the house. In any given year, there is a 20% chance that the house will burn down. If it does, its scrap value will be \$600,000. Jenny’s utility function of wealth is
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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.hw4 - Department of Economics, HKUST ECON 198...

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