PS1 - Econ 277A Winter 2011 Problem Set 1 Due no later than...

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Econ 277A Winter 2011 Problem Set 1 Due no later than 1/27 Problem 1 Suppose Kory is going to live for two periods. His lifetime utility is the sum of his period 1 and 2 utility, ln(1 + c 1 - r 1 ) + ln(1 + c 2 - r 2 ) . His budget constraint is c 1 + c 2 1. He is born with a fixed r 1 [0 , 1], r 2 is determined by r 2 = γc 1 + (1 - γ ) r 1 , where γ [0 , 1] is a parameter. a Briefly interpret these preferences. How do each period’s preferences compare to the reference-dependent preferences we’ve been studying? Comment on one or two unre- alistic aspects of these preferences. b Solve for Kory’s optimal consumption profile ( c * 1 ,c * 2 ), as a function of r 1 and γ . c Interpret. This includes commenting on the predicted values when γ = 0 and γ = 1, and the comparative statics. When is c 1 * > c * 2 ? Problem 2 Suppose people are told about the contents of two urns: Urn 1 contains 100 balls, some of which are red and some of which are black. Urn 2 contains 100 balls, of which 50 are red and 50 are black.
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PS1 - Econ 277A Winter 2011 Problem Set 1 Due no later than...

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