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Unformatted text preview: Economics 467 Spring 2010 Karl Dunz Problem Set 1 due Monday February 15 You are encouraged to work in groups on these problems; however, you must turn in your own work, not a copy of what the group has done. Also, I will not accept any late assignments since I will post answers to these problems shortly after the due date. 1. [6 points] Consider the following three lotteries: u1D43F 1 = [480 , . 5; 480 , . 5], u1D43F 2 = [850 , . 5; 200 , . 5], and u1D43F 3 = [1000 , . 5; 0 , . 5]. Each lottery represents the consumption an agent would receive if they invested in the corresponding project. (a) Which lottery would a risk-neutral agent choose? (b) Which lottery would a risk-averse agent with a von Newmann-Morgenstern utility function of u1D462 ( u1D450 ) = u1D450 1 / 2 choose? Would all risk-averse agents make the same choice? Explain your answer. (c) Which lottery would a risk-loving agent with a von Newmann-Morgenstern utility function of u1D462 ( u1D450 ) = u1D450 2 choose? Would all risk-loving agents make the same choice? Explain your answer. 2. [3 points] Consider a case with the following facts. John Doe was struck by a speeding taxi as he crossed a street. The taxi was driving the wrong way down a one-way streettaxi as he crossed a street....
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