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

Info iconThis 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
Background image of page 1

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

View Full DocumentRight Arrow Icon
C. .10 chance of $5,000,000 .90 chance of $0 D. .11 chance of $1,000,000 .89 chance of $0
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 03/18/2012 for the course ECON 201 taught by Professor Çakmak during the Spring '10 term at Middle East Technical University.

Page1 / 3

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

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online