midtermsolutions_winter2007

midtermsolutions_winter2007 - Econ 51 Midterm Solutions 1...

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Econ 51: Midterm Solutions 1. Short questions (36 points, 6 points each) (a) Yes, these are vNM preferences. We can write u ( x; y ) = 1 4 v ( x ) + 3 4 v ( y ) where v ( x ) = 8 log( x ) + 28 x 3 10. apples and bananas to Rob ( e R = (20 ; 20) ; e T = (0 ; is to give all of it to Tom ( e R = (0 ; 0) ; e T = (20 ; 20)). (c) The contract curve is the main diagonal of the Edgeworth box (which is a square in this case), b R = a R . In words, all allocations that give Rob (and Tom) the same number of apples and bananas. allocation, there is no way to make one guy better o± without making the other guy worse o±. (e) Since both guys like apples, hate bananas, and don’t care about chilly peppers, the best we can do is to convert everything to apples. Luckily, our ²rms can do this: ²rm 2 will convert the chilly peppers to bananas, and ²rm 3 will convert these and the original bananas to apples, so there would be 15 apples overall, and nothing else. Any (f) Country B has absolute advantage in both apples and bananas. Neither country has a comparative advantage in apples or bananas. 2. Uncertainty (34 points) (a) We will have to solve max C f & 0 ;C e & 0 0 : 8 v ( w p f C f p e C e ) + 0 : 1 v ( w D p f C f p e C e + C f ) + +0 : 1 v ( w D p f C f p e C e + C f + C e )
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midtermsolutions_winter2007 - Econ 51 Midterm Solutions 1...

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