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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....
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 Spring '10
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