Eco 354K Midterm Exam #1
(5%) Put only your Student ID on your answer sheets, and start each answer on a
1. (20%) Briefly define the following terms:
b) information set;
c) perfect recall;
d) perfect information.
2. (40%) Lucy faces uncertainty over the set of monetary outcomes Y
$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
Further, she is indifferent between lotteries p
, both on Y. Assume
Lucy's preferences satisfy the axioms of Expected Utility theory.
= (0.1, 0, 0, 0.9)
= (0, 0.5, 0.5, 0)
= (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($20)?
c) For what value of
would Lucy be indifferent between the following two
= (1/4, 1/4, 1/4, 1/4)
d) Is Lucy risk averse, neutral or loving? [Hint: plot u($m) versus $m.]
3. (40%) Bubba Wildcat has the opportunity to buy a tract of land under which