midtermsolutions_Winter2008

midtermsolutions_Winter2008 - Econ 51 Midterm Solutions 1...

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Econ 51: Midterm Solutions 1. Short questions (32 points) (a) I. Yes, these are vNM preferences with a vNM utility function v ( x ) = log( x ), which represents a risk averse individual. The individual will not take the lottery because (using a calculator) u (0 : 2 ; & 0 : 8) < u (0 ; 0). II. Yes, these are vNM preferences with a vNM utility function v ( x ) = exp( x ), which represents a risk loving individual. The individual will take the lottery because (using a calculator) u (0 : 2 ; & 0 : 8) > u (0 ; 0). III. This case represents the same utility function as case II (one is simply a monotone transformation of the other), so the answers are the same. IV. No, these are not vNM preferences. The individual will not take the lottery because (using a calculator) u (0 : 2 ; & 0 : 8) < u (0 ; 0) (note that although these are not vNM preferences, these are still preferences, so we can compare utilities). (b) allocation, (5 ; 5). bananas (5), and Friday will consume the rest (Rob and Tom don’t like additional bananas, while Friday doesn’t mind having them). As for apples, any allocation
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This note was uploaded on 03/19/2011 for the course ECON 51 taught by Professor Tendall,m during the Winter '07 term at Stanford.

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midtermsolutions_Winter2008 - Econ 51 Midterm Solutions 1...

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