ajaz_eco204_2009_HW_3

ajaz_eco204_2009_HW_3 - University of Toronto, Department...

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Unformatted text preview: University of Toronto, Department of Economics, ECO 204 20092010 S. Ajaz Hussain ECO 204 2009 2010 S. Ajaz Hussain HW 3 Please help improve the course by sending me an email about typos or suggestions for improvements _____________________________________________________________________________________ Note: Please don't memorize these solutions in the expectation that similar questions will appear on tests and exams. Instead, try to understand how to derive the answer as you'll be tested on techniques and applications, not on memorization. Moreover, tests and exams will cover topics and techniques that may not be in these practice problems. You are urged to go over all lectures, class notes and HWs thoroughly. In this HW you will review and practice consumption sets, preferences and indifference curves. Question 1 (Summer 2009 Final Exam Question) In the graph below, depict the consumption set of a consumer who, due to physical constraints, can consume any amount of good 1 and a maximum number of 10 units of good 2. Moreover, for the first 20 units of good 1, good 2 can be consumed in any amount (up to a maximum amount of 10 units); but for more than 20 units of good 1, good 2 must be consumed in integer amounts. Question 2 Suppose 3 people, Britney, Jonas and Rihanna are asked about their preferences over goods B, E and G. Their responses, in order of preference are: 1 University of Toronto, Department of Economics, ECO 204 20092010 S. Ajaz Hussain Order Britney Jonas Rihanna 1 2 3 That is, Britney's preferences are preferences are B E G E G B G B E f f f f , Jonas's preferences are f f and Rihana's . (a) Suppose Britney, Jonas and Rihana are on a committee and are asked to choose between goods B vs. E on the basis of a majority voting rule. What will be the committee's decision? (b) Suppose the three individuals are on a committee and are asked to choose between goods vs. on the basis of a majority voting rule. What will be the committee's decision? (c) Suppose the three individuals are on a committee and are asked to choose between goods vs. G on the basis of a majority voting rule. What will be the committee's decision? (d) Now suppose the committee itself is interpreted as a single individual. Based on the answers in (a) through (c), are the committee's preferences complete? Transitive? Question 3 Suppose an individual's indifference curves are "thick: What kind of preferences does this individual not have? 2 University of Toronto, Department of Economics, ECO 204 20092010 S. Ajaz Hussain Question 4 (Part of a Summer 2009 Final Exam Question) Suppose investors only care about the (expected) return and risk of their portfolios. The following figure depicts the indifference curves for two investors A and B: Which investor is more risk averse (i.e. does not like risk)? 3 ...
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This note was uploaded on 05/02/2011 for the course ECO 204 taught by Professor Hussein during the Fall '08 term at University of Toronto.

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