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

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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
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