Answer+Key+to+HW6

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

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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

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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
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## 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.

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

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