riskproblems

# riskproblems - Homework Problems on Expected Utility Fall...

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Homework Problems on Expected Utility Fall 2009, Econ 210A UCSB 1. Randy Variable is an expected utility maximizer with a von Neumann Mor- genstern utility function v ( x ) = x 1 / 2 . He has a wealth of \$99 , 000. His shady brother-in-law has given him inside information on the outcome of an upcoming sports event. On the basis of this information, Randy believes that the prob- ability that Team A will defeat Team B is 2/3, despite the fact that Team B is two-to-one favorite to win among the betting community. It is possible for Randy to bet as much money as he wishes on Team A to win at the prevailing odds. That is, for every dollar that he bets, he will get back \$2 if Team A wins and will get back nothing if Team A does not win. a. Let x A be the contingent commodity “wealth if Team A wins” and let x B be “wealth if Team B wins.” Write a budget equation expressing the combinations of x A and x B that Randy can aﬀord by betting some amount of money on Team A. Draw a graph to show all of these combinations.

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## This note was uploaded on 12/25/2011 for the course ECON 210A taught by Professor Bergstrom during the Fall '09 term at UCSB.

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riskproblems - Homework Problems on Expected Utility Fall...

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