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
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '11
 econ
 Game Theory, Utility, Bubba Wildcat, expected utility theory, Lucy risk averse

Click to edit the document details