Econ171-Winter2010-Final-sols-1

# Econ171-Winter2010-Final-sols-1 - Economics 171 Decisions...

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Economics 171: Decisions Under Uncertainty Final Exam Solutions: Winter 2010 1. (10 pts) Steve is planning a fishing trip next month. The probability is 0.7 that the water will be cold of the coast of Los Angeles and the probability is 0.3 that the water will be warm there. The probability is 0.8 that the water will be cold of the coast of San Diego and the probability is 0.2 that the water will be warm there. Regardless of which location Steve chooses he’ll catch 30 pounds of fish if he fishes in cold water and 10 pounds of fish if he fishes in warm water. Steve’s utility increases as the weight of fish he catches increases. a. What decisions are available? {Los Angeles, San Diego} b. What states of nature could occur? {C LA C SD , C LA W SD , W LA C SD , W LA W SD } c. What are the possible outcomes? {30 lbs, 10 lbs} d. Which action maximizes his expected utility? If more information is needed to answer this question, explain what information. San Diego. There are only two outcomes and San Diego has a higher probability of the better one.

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2. (12 pts) Amy has a choice between lottery A = (\$20, 0.4; \$100, 0.6) and lottery B = (\$20, 0.2; \$50, 0.5; \$100, 0.3). Assume her utility for \$20 is 0 and that her utility for \$100 is 1. Shelly is indifferent between receiving \$50 with certainty and a lottery equal to (\$20, 0.3; \$100, 0.7). a. Which lottery has a higher expected value (in terms of the dollar payout)? E[ A ] = 0.4(20) + 0.6(100) = \$68 E[ B ] = 0.2(20) + 0.5(50) + 0.3(100) = \$59 A has a higher expected value.
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Econ171-Winter2010-Final-sols-1 - Economics 171 Decisions...

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