{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

ps4fall200_201 - 14.03 Problem Set#4 Fall 2000 Due in...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
14.03 Problem Set #4 Fall 2000 Due in Class #14 Theory 1. Nicholson problem 8.5 2. Bill is a Von-Neumann Morgenstern expected utility maximizer with a well-behaved, continuously differentiable utility function (i.e., no kinks or inflection points). Bill is presented with the following choices: A. $1,000 for sure B. 50% chance of $800 50% chance of $1,500 C. $500 for sure D. 50% chance of $400 50% chance of $900 Bill is indifferent between A and B and is also indifferent between C and D. (Note: this does not imply that he is indifferent between A and C or B and D.) Part 1 . Is Bill risk neutral, risk averse, risk loving, or can’t you tell? Explain. He is now faced with the following choice: E. $750 for sure F. 25% chance of $400 25% chance of $900 25% chance of $800 25% chance of $1,500 Part 2 . Will Bill choose E or F, or is he indifferent between them, or is not possible to tell? (You must prove your answer) 3. Consider these four choices: A. $1,000,000 for sure B. .10 chance of $5,000,000 .89 chance of $1,000,000 .01 chance of $0 1
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
C. .10 chance of $5,000,000 .90 chance of $0 D. .11 chance of $1,000,000 .89 chance of $0 Before reading any further, choose which you prefer between A and B, and then choose which you would prefer between C and D. (The choice you make will not affect your grade.)
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern