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14.03 Problem Set #4 Fall 2000
Due in Class #14
Theory
1. Nicholson problem 8.5
2.
Bill is a VonNeumann Morgenstern expected utility maximizer with a wellbehaved,
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
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View Full Document C.
.10 chance of $5,000,000
.90 chance of $0
D.
.11 chance of $1,000,000
.89 chance of $0
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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.
 Spring '10
 çAKMAK
 Microeconomics, Utility

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