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EEP 100
Homework # 6
Perloff
Optional: Not to be handed in
Questions
1.
Discussing the $350 price of a ticket for one of her concerts, Barbra Streisand
said, “If you amortize the money over 28 years, it’s $12.50 a year. So is it worth $12.50 a
year to see me sing? To hear me sing live?” Under what condition is it useful for an
individual to apply Ms. Streisand’s rule to decide whether to go to the concert? What do
we know about the discount rate of a person who makes such a purchase?
2.
Jen’s utility function with respect to wealth is
U
(
W
)
=
.
W
Plot this utility
function and illustrate in your figure why Jen is risk averse.
3.
If criminals are rational, crime is deterred by large expected punishments, which
are the product of the fine or the sentence given that the criminal is convicted and the
probability of being caught and convicted. Thus, one can raise the expected value of the
punishment by raising either the penalty or the odds of capture and conviction. Is the
following argument logical? “I propose executing one or two spammers. That way, even
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 Spring '10
 PERLOFF

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