h6f10 - Explain whether these numbers show the consumer is...

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ECO 304K INTRO MICRO Fall 2010 Hickenbottom HOMEWORK #6 (Due December 3 nd at 12pm) 1. There are two firms producing the same good. Each firm has the cost structure 30 ) ( 2 + = q q TC . These are the only two firms in the market where the MARKET demand for the good = P = -2Q + 50. a) Find the profit of each firm if EACH firm produces 5 units of output. Show that if one firm produces 6, but the other stays at 5, the firm producing 6 earns more profit. (1 point) b) Write the matrix for a game where the strategies for each firm are “produce 5” and “produce 6”. The numbers from (a) and (b) will help you fill in some of the payoffs but others will take some more calculation. (1 point) c) Explain why the game is a prisoner’s dilemma. (2 points) 2. A consumer has a utility function INCOME U = . For example, if the person has an income of 9, the utility is 3. a) Calculate the consumer’s marginal utility of income i) going from an income of 16 to an income of 25 and ii) going from an income of 49 to an income of 64
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Unformatted text preview: Explain whether these numbers show the consumer is risk-averse, risk neutral, or risk loving. (1 point) b) Calculate the expected income and expected utility in each of the following situations: i) The consumer has a 5% chance of earning $225 and a 95% chance of earning $81 ii) The consumer has a 49% chance of earning $144 and a 51% chance of earning $36 Explain, using your answer to (a) and the numbers you just calculated which of these situations is riskier. (2 points) c) Consider a consumer in situation (ii) who is offered the following deal from an insurance company: I will pay you $85 today and you give me your income no matter what it is. Explain why this deal is good for the consumer. If there are 100 people like this and the insurance company sells this deal to all of them, find out how much money the insurance company makes on average and use this to explain why they would offer this deal. (2 points)...
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This note was uploaded on 02/28/2011 for the course ECO 304K taught by Professor Hickenbottom during the Spring '10 term at University of Texas at Austin.

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