Problem Set 9
Discussion Sections
Economics 200
1.
Smith purchases a dozen eggs and must take them home. The probability that all of the eggs carried
on any one trip will be broken during the trip is onehalf.
Trips home are costless.
Smith is
considering two strategies: (i) take all of the eggs in one trip, or (ii) take two trips with six eggs in
each trip.
Show that if Smith is risk averse, then he should not put all of his eggs in one basket.
2 trip breaking all:
1/2 *1/2
1 trip breaks all
1/2
E(x) are same. Adverse will choose to separate
2.
You are thinking of buying an oilfield.
The probability that there are zero barrels of oil in the field is
1/3, the probability that there are 30 barrels of oil in the field is 1/3, and the probability that there are
120 barrels of oil in the field is 1/3.
The current owner of the oilfield could earn a profit of $1.00 on
each barrel of oil and so, for example, if there are 30 barrels of oil he will earn a profit of $30.
You
are a very efficient oil producer and you could earn a profit of $1.50 on each barrel of oil.
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 Spring '08
 Bulmash
 Economics, Barrel, Farmer Dan

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