samp_ex1 - Sp'04 Prof. Stahl Eco 354K Midterm Exam #1 (5%)...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
Sp'04 Prof. Stahl Eco 354K Midterm Exam #1 (5%) Put only your Student ID on your answer sheets, and start each answer on a new page. 1. (20%) Briefly define the following terms: a) event; b) information set; c) perfect recall; d) perfect information. 2. (40%) Lucy faces uncertainty over the set of monetary outcomes Y {$30, $20, $10, $0}. Assume that all other aspects of the state of the world are irrelevant. She is indifferent between $10 for sure and the lottery p A on Y. Further, she is indifferent between lotteries p B and p C , both on Y. Assume Lucy's preferences satisfy the axioms of Expected Utility theory. p A = (0.1, 0, 0, 0.9) p B = (0, 0.5, 0.5, 0) p C = (0.3, 0, 0, 0.7) a) Letting u($30) = 1 and u($0) = 0, what is u($10)? b) Letting u($30) = 1 and u($0) = 0, what is u($20)? c) For what value of α would Lucy be indifferent between the following two lotteries? p D =( α ,0,0,1- α ) p E = (1/4, 1/4, 1/4, 1/4) d) Is Lucy risk averse, neutral or loving? [Hint: plot u($m) versus $m.] 3. (40%) Bubba Wildcat has the opportunity to buy a tract of land under which
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 06/09/2011 for the course ECON 354 taught by Professor Econ during the Spring '11 term at University of Texas at Austin.

Ask a homework question - tutors are online