Answer+Key+to+HW6 - Answers HW 6 April 30, 2010 1) An...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Answers HW 6 April 30, 2010 1) An individual would have to use a discount rate of zero in order for this rule to apply. 2) See graph. Because Jen has a concave utility function, in every case the utility of her expected wealth is greater than the expected utility of her wealth. That is, for any p, where p is the probability of a payout of R 1 and 1-p is the probability of a payout of R 2 : U ( pR 1 + (1 p ) R 2 ) > pU ( R 1 ) + (1 p ) U ( R 2 ) (1) For example, if p=.25, R 1 = 16 and R 2 =0, U ( : 25 ± 16+ : 75 ± 0) = p 4 = 2 > : 25 U (16)+ : 75 U (0) = : 25 p 16+ : 75 p 0 = 1 (2) than the expected Utility of the payo/ (*). 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
3) If the probability of being caught is low enough (only 2 caught per 1 million) the expected disutilty of being caught could be so low as to not be a deterrent, even with a very high punishment. Therefore, additional expenditure is still necessary for enforement for a credible deterrent. Ideally, lawmakers
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/04/2011 for the course EEP 100 taught by Professor Perloff during the Spring '10 term at University of California, Berkeley.

Page1 / 3

Answer+Key+to+HW6 - Answers HW 6 April 30, 2010 1) An...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online