73-150/Kesten Posted: 11/14/2008 Due: 11/21/2008 ________________________________________________________________ Homework Assignment 6 ________________________________________________________________ 1. Suppose you are the caring father/mother of a young daugter, and your daughter’s success at school means a lot to you. She, on the other hand, doesn’t care one bit about school, and her utility depends entirely on the pocket money she gets from you (w) and her disutility from studying (s) for classes: U(w, s)=ln(w) – 2s - 4 She may choose to either ‘study’ for school (s=1) or not (s=0). As her father/mother, it is your responsibility to ensure that her utility is non-negative (let’s say, otherwise, she will drop out of school). You can’t monitor her actions but you can learn from her teacher whether she is succesful or not. If she studies, then she will be successful at school with 70% chance (but of course, no guarantees), if she does not study at all, then her success probability drops down
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