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problem9

# problem9 - income if working is Y The worker’s utility...

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Problem Set 9 Econ 115a December 5, 2007 Be sure to mark your paper with your name, your teaching assistants’ name and section time. 1. Define (a) Moral Hazard (b) Expected Utility (c) Adverse Selection 2. Consider two “lotteries” that represent possible economic situations. The first returns \$4 with certainty. The second returns \$1 with probability 1 2 and \$9 with probability 1 2 . (a) What is the expected dollar value of the two lotteries? (b) Suppose that Jane values the outcome of a lottery according to a utility function y , where y is the return from the lottery. (c) Is Jane risk averse? (d) What is Jane’s expected utility from each of the two lotteries? (e) Which lottery would Jane prefer (or is she indifferent)? 3. Consider a worker who might be laid off with probability p . Income if laid-off is 0, while

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Unformatted text preview: income if working is Y . The worker’s utility function is U ( Y ), which exhibits declining marginal utility of income. (a) What is the slope of a “expected-utility indiﬀerence curve” (a curve that gives equal utility for diﬀerent combinations of income in the two states)? (b) Draw a graph demonstrating that the worker would be willing to accept a lower expected income in return for eliminating the risk of being laid-oﬀ. (c) Would the worker want to buy unemployment insurance if it was oﬀered at “fair rates” for the worker’s situation? 1 (d) Can you think of any problems that would lead private ﬁrms to be reluctant to oﬀer unemployment insurance? (e) Can you think of any problems with government-provided unemployment insurance? 2...
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problem9 - income if working is Y The worker’s utility...

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