This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: Homework 1 Answer, Spring 08 (Total 20 points) 1 (1 × 2): (i) You have an income of $80 to spend on two commodities. Commodity 1 costs $2 per unit and commodity 2 costs $5 per unit. (i) Write down your budget equation. (ii) What is the opportunity cost of an extra 1 unit of good 1? Answer : (i) 2 x 1 + 5 x 2 = 80. (ii) 2 / 5 = 0 . 4 units of good 2. 2 (1.5 × 4): There are two states of the world, sunny (state 1) and rainy (state 2). The probability of state 1 is 0.7. Bob and Nancy are facing a problem to choose among contingent consumptions, in which a bundle ( x 1 ,x 2 ) denotes receiving x 1 units when state 1 occurs and receiving x 2 units when state 2 occurs. Bob cares only about the expected value of contingent consumption. Nancy is ex tremely cautious and she cares only about the worst case, i.e, the case where the realized consumption is smaller. (i) Draw indifference curves that describe their preferences, respectively....
View
Full
Document
This note was uploaded on 10/25/2010 for the course ECO 420K taught by Professor D during the Spring '10 term at University of Texas.
 Spring '10
 d

Click to edit the document details