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Unformatted text preview: Intermediate Microeconomics, 2008 Problem Set No 7 due: Monday, Feb 4; Tuesday, Feb 5 Problems Please, answer the following questions in the book. Chapter 5, Question 20, 30, Chapter 16, Question 4, 8, 14 (Note: You don&t need to use a decision tree to answer problem 8). 1) The graphic below shows the preferences of two persons over bets. a) Who do you think puts a higher subjective probability on Tiger winning? b) Can you draw the indi/erence curves for the case that the decision make is certain that Tiger will win? 2) The graphic below shows the preferences of two persons over bets. Who do you think is more risk averse? Can you nd the the certainty equivalent for the bet (1,3)? (Certainty equivalent: Suppose you can choose between the bet (x,y) and an amount $M for sure. The certainty equivalent of (x,y) is the amount $M that makes you exactly indi/erent between the bet (x,y) and the money $M.) 1 3) Consider the following bets on Donkey and Tiger: A=(1,3),B=(5,5), C=(10,0), D=(6,4) a) Calculate the variance and the expected value of the bets, if the probability that Tiger wins is & = 0 : 5 . b) Suppose a decision maker has a utility function for money given by u ( x ) = p x . If she believes that Donkey and Tiger are equally likely to win, how will she rank the bets? c) Calculate for each bet the certainty equivalent. d) Suppose the utility function of the decision maker is u ( x ) = 7 x . How will she decide now? How will she decide if it is u ( x ) = 6 x + 1 ? Can you explain you &nding? e) Suppose the utility function of the decision maker is u ( x ) = x 2 . How will she decide now? Can you explain you &nding?...
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This note was uploaded on 12/10/2011 for the course ECON 401 taught by Professor Burbidge,john during the Winter '08 term at Waterloo.
- Winter '08