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Solutions_to_Practice_test_for_Midterm - Department of...

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Department of Economics Intermediate Microeconomics W3211 Columbia University Fall 2011 SO LUTIONS T O PRA C TIC E Exam Prof . S e yhan Erd e n Arkona c In s tru c tion s 1. Do not turn this page until so instructed. 2. Please put your answers in the space provided under each question. 3. This exam has total of 100 points. 4. You are permitted to use a simple calculator. No computers, wireless, or other electronic devices without prior permission. You may not share resources with anyone else. 5. Some questions ask you to draw a real-world judgment in a problem of practical importance. The quality of that judgment counts. For example, consider the question: “It is 10 o F outside. In your judgment, why are so many people wearing heavy coats?” The answer, “To stay warm” would receive more points than the answer, “Because they are fashion - conscious.” 6. Put your nam e and Columbia UNI on th e c ov e r of th e e xam . Nam e : ___________________________________________________ UNI: ____________________________________________________
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Qu e s tion 1 [24 pt s ] : Sarah has the utility function U(x) = 1 - 1/x, where x is the present value of her lifetime income. Sarah is trying to select a career. If she goes into teaching, she will make x=5 with certainty. If she pursues acting, she will make x=400 if successful or x=2 if unsuccessful (and therefore ends up waiting tables). The chance of succeeding in acting is 1% if she pursues acting. a . Determine which career Sarah will choose. Is she choosing the career with the higher expected value? Explain. b . An acting career expert charges 0.01 to determine if a person will succeed at acting. By going to an expert, Sarah can choose the best career according to her skills. Assuming
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