pset2_s10 - Economics 217 Spring 2010 Problem Set 2...

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Economics 217 Spring 2010 P r o b l e m S e t 2 (Answers to due in class Tuesday, Feb. 9th, to be discussed Friday, questions 1-2 Feb. 12th; ) Please denote which recitation you plan to attend on Friday 1. Jacob is a farmer, farming 100 acres. Jacob must decide how many of his 100 acres to plant to wheat and how many to plant to corn. His income is certain to be $100 for each acre of wheat. For each acre of corn, the income depends on the weather. Income will be $200 per acre of corn if the growing season is rainy, but only $50 per acre if it is dry. The probabilities of rainy and dry growing seasons are each equal to 0.5. a) If Jacob is only concerned with maximizing expected income, how many (of the 100) acres should he plant to corn? b) Supposed Jacob is risk averse, with utility function . If Jacob ?Ð38-97/Ñ œ 68Ð38-97/Ñ maximizes his expected utility, how many acres of corn will he plant? 2. Consider a sunglass salesman and 2 states of the world: sunny and rainy. Each state is equally likely. Suppose the sunglass salesman has income of 150 if sunny and 50 if rainy.
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pset2_s10 - Economics 217 Spring 2010 Problem Set 2...

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