Econ+395+Practice+Final+Fall+2008

Econ+395+Practice+Final+Fall+2008 - Economics 395 Topics in...

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Economics 395 Topics in Risk and Uncertainty Practice Final Examination Question One Fred owns an asset of uncertain value. Ginger may be interested in buying the asset from Fred, if an appropriate price can be found. The possible values it can take are { } . 3 , 2 , 1 , 0 v Fred and Ginger have the same prior: that each of these values is equally likely. Before negotiating over the sale of the asset, Ginger and Fred each receive private information providing more accurate insight into the value of the asset. Fred receives one of two signals, f 1 or f 2 , where: Signal f 1 tells Fred that the asset has value v = 0 Signal f 2 tells Fred that the value of the asset is not 0 Similarly, Ginger receives one of two signals, g 1 or g 2 , where: Signal g 1 tells Ginger that the asset has value v = 3 Signal g 2 tells Ginger that the value of the asset is not 3 The signals that the agents receive are always true. This means that it is impossible for Ginger to receive signal g 1 at the same time that Fred receives the signal f 1 . Also assume that both agents are rational and risk-neutral and that each knows what private information the other might possibly obtain. The actual signal received by either agent will remain private information, not shared directly with the other.
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