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midterm_Spring2004 - Econ 51 Midterm Instructions This is a...

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Econ 51: Midterm April 27, 2004 Instructions: This is a closed book, closed-notes exam. You are allowed to use a hand-held calculator (i.e. no laptop) You have 110 minutes. Please answer all 3 questions. Please use a separate blue book for each question. Always remember: think before you do the math. Good luck! 1 True/False questions (36 points) For each of the statements below, indicate whether it is true or false, and explain. Explana- tions cannot exceed two sentences. Grading: You earn 3 points for each right answer; you earn 3 additional points for each correct explanation, which does not exceed two sentences. You lose 2 points for each incor- rect answer (no matter what the explanation is). You get zero points if you do not answer. Thus, if you do not know the answer you may be better o ff not answering. (a) Let x and y be the consumption in two states of the world. The utility function u ( x, y ) = 10 + 2 x 2 + 6 y 2 + 21 y 3 + 7 x 3 does not represent vNM preferences. (b) An individual with vNM utility v ( x ) = e 7 x is risk averse. (c) There are apples ( a ) and bananas ( b ). Tom and Rob have identical utility function u ( a, b ) = max( a, 15). There are 20 apples and 20 bananas on the island. Any point in
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