Microeconomic Theory
12th Edition
ISBN: 9781337517942
Author: NICHOLSON
Publisher: Cengage
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Question
Chapter 7, Problem 7.10P
a
To determine
To find:
Option value of a flexible fuel car when a person is risk neutral.
b)
To determine
To find:
Option value of a flexible fuel car.
c)
To determine
To find:
Affect on option value of a car.
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Students have asked these similar questions
To go from Location 1 to Location 2, you can either take a car or take transit. Your utility function is:
U= -1Xminutes -5Xdollars +0.13Xcar (i.e. 0.13 is the car constant)
Car= 15 minutes and $8
Transit= 40 minutes and $4
What is your probability of taking transit given the conditions above?
What is your probability of taking transit if the number of buses on the route were doubled, meaning
the headways are halved?
Remember to include units.
Redo the problem in Question 2 under the assumption that the person has utility
function u(c) = ln(c) (instead of u(c)=√C). The other parameters are the same as
those used in Question 2. How the solution found in Question 2 will change?
Q2:
A person has wealth of $500,000. In case of a flood her wealth will be reduced to
$50,000. The probability of flooding is 1/10. The person can buy flood insurance at a
cost of $0.10 for each $1 worth of coverage. Suppose that the satisfaction she derives
from c dollars of wealth (or consumption) is given by u(c) = √c. Let CF denote the
contingent commodity dollars if there is a flood (horizontal axis) and CNF denote the
contingent commodity dollars if there is no flood (vertical axis).
Determine the contingent consumption plan if she does not buy insurance.
1
2
Assume that the person has von Neumann-Morgenstern utility function on the
contingent consumption plans. Write down the expected utility U(CF, CNF) and
derive the MRS.
Solve for optimal (CF,…
There is an urn containing 90 balls: 30 of them are red, and the other 60 are either black or
white. One ball will be drawn randomly, and its color will be inspected. R denotes the event of
a red ball drawn from the urn and the events B, W are defined similarly. Gambling on an event
means receiving $100 if the even obtains and zero otherwise. Consider the following gambles:
The most common preferences are r>r and yy.
x= (R: 100, B:0, W:0), a = (R: 0, B: 100, W:0),
y= (R: 100, B:0, W: 100), = (R: 0, B: 100, W: 100).
a. Can the majority choice pattern be
explained by (subjective) EU?
O No
Yes
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