Econ171-Winter2009-Final-sols

Econ171-Winter2009-Final-sols - Economics 171: Decisions...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Economics 171: Decisions Under Uncertainty Solutions to Final Exam: Winter 2009 1. (10 pts) Lottery A = ($50, 0.2; $80, 0.8). Lottery B = ($60, 0.2; $80, 0.8) a. Which lottery is chosen by the maximin criterion? B b. Which lottery is chosen by the maximax criterion? Indifferent. c. What does first order stochastic dominance say about the two lotteries? Show your work/explain. B FOSD A. Going from A to B, the 0.2 mass on $50 shifts right to $60. d. What does second order stochastic dominance say about the two lotteries? Show your work/explain. B must SOSD A because it FOSD A.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2. (15 pts) Fran is a vNM expected utility maximizer. She needs to choose between lottery A and lottery B . Lottery A is ($0, 0. 2; $100, 0.8) and lottery B is ($20, 0.4; $100, 0.6). Assume her utility for $0 is 0 and that her utility for $100 is 1. a. She’s indifferent between a lottery that’s ($0, 0.7; $100, 0.3) and a certain payment of $20. What’s her utility for $20? EU($0, 0.7; $100, 0.3) = u($20) 0.7(0) + 0.3(1) = u($20) u($20) = 0.3 b. Will she choose lottery A or B ? Show your work. EU(A) = 0.2(0) + 0.8(1) = 0.8 EU(B) = 0.4(0.3) + 0.6(1) = 0.72 She prefers A to B. c. She is indifferent between lottery B and lottery C which is ($0, 0.2; $20, 0.3; $150, 0.5). What’s her utility for $150?
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 10/21/2010 for the course ECON 809880 taught by Professor Herbnewhouse during the Spring '09 term at UCSD.

Page1 / 6

Econ171-Winter2009-Final-sols - Economics 171: Decisions...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online