Homework 1, Spring 10
(Total 20 points)
Due on Feb. 2, Tue.
1
(1.5
×
2): (i) You have an income of $120 to spend on two commodities. Good 1
costs $4 per unit and good 2 costs $3 per unit.
(i) Write down your budget equation.
(ii) What is the relative price of good 1 for good 2?
Answer
: (i) 4
x
1
+ 3
x
2
= 120. (ii)
p
1
p
2
=
4
3
.
2
(2
×
4): There are two possible election outcomes, Obama’s winning (state 1) and
McCain (state 2). There are two news sources, A and B. A says that the probability
of Obama’s winning is 3
/
5, and B says that it is 1
/
3.
There are two investors, John and Mary, who are going to make investments on
securities that are related to the election outcome. Return of securities is summarized
in the form of a statecontingent consumption vector, (
x
1
, x
2
), which denotes receiving
x
1
units if state 1 occurs and receiving
x
2
units if state 2 occurs.
Here are their decision criterions, respectively.
John: I just believe what A says. To evaluate (
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 Spring '10
 d
 Utility, X1, ln X1

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