homework 02 - Homework 2 FIN 625 Due Monday December 13...

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Homework 2 FIN 625 Due Monday December 13, 4:00 pm 1. For an individual who consumes only two goods, x and y , explain how we represent the opportunity cost of consuming one more unit of x in terms of how much y must be given up. 2. Suppose an individual’s whose utility function is given by U(x, y) = 4 x + 2 y a. Give two other bundles that, with this utility function, the provide the same utility as bundle (3,2). b. What is the MRS for this utility function? Explain in 2-5 sentences. 3. Suppose an individual's MRS (of steak for beer) is 2 s / b and this person is currently consuming equal amounts of steak and beer. Suppose also that the price of a steak is $1 and a beer is $4. Then what should the individual do in order to increase utility? Explain in 3-5 sentences. 4. If an individual's utility function for coffee ( x ) and cream ( y ) is given by U(x, y) = min (x, 5 y) , write the demand function for coffee . 5. Which of the following utility functions represent the same preferences as a. . b. U(x, y) = x
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Unformatted text preview: ⋅ y. c. U(x, y) = ln x + ln y . d. All of these represent the same preferences. EXPLAIN your result in 3-5 sentences. 6. Problem 4.12 on page 135 of the text. 7. Assume x and y are the only two goods a person consumes. If after a rise in p X the quantity demanded of y increases. Evaluate the following as true or false and explain. Support your explanation with a graph. The income effect dominates the substitution effect for good y. 8. Suppose a person's utility of wealth is given by and his or her initial wealth is 10,000. What is the maximum amount he or she would pay for insurance against a 50 percent chance of losing 3,600? 9. Which of the following utility functions would indicate the most (relative) risk averse behavior? a. U(W) = W . b. U(W) = . c. U(W) = ln W . d. U(W) = . 1/ W . EXPLAIN your result in 1-3 sentences. 10. Complete the following sentence IN TERMS OF CHAPTER 7: An option may add value to a transaction because:...
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