Suggested questions and exercises (Pindyck and Rubinfeld, Ch. 5).
Questions: 1, 2, 3, 5
Exercises: 1, 3, 6, 7
QUESTIONS
1.
What does it mean to say that a person is risk averse?
Why are some people likely
to be risk averse, while others are risk lovers?
2.
Why is the variance a better measure of variability than the range?
3.
George has $5,000 to invest in a mutual fund.
The expected return on mutual
fund A is 15% and the expected return on mutual fund B is 10%.
Should George
pick mutual fund A or fund B?
5.
Why do people often want to insure fully against uncertain situations even when
the premium paid exceeds the expected value of the loss being insured against?
EXERCISES
1.
Consider a lottery with three possible outcomes: $125 will be received with
probability .2, $100 with probability .3, and $50 with probability .5.
a.
What is the expected value of the lottery?
b.
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 Fall '10
 Tontz
 Microeconomics, Probability theory, Natasha

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