# Microeconomics Midterm PQ 1

By antzen
Oct 17, 2013
2522 Words

EC370, Midterm I, Practice Questions

1.

If she spends all of her income on uglifruits and breadfruits, Maria can just afford 11 uglifruits and 4 breadfruits per day. She could also use her entire budget to buy 3 uglifruits and 8 breadfruits per day. The price of uglifruits is 6 pesos each. How much is Maria’s income per day? a. 115 pesos

b. 105 pesos

c. 114 pesos

d. 119 pesos

2.

Bella’s budget line for x and y depends on all of the following except a. the amount of money she has to spend on x and y.

b. the price of x.

c. her preferences between x and y.

d. the price of y.

3.

Your budget constraint for the two goods A and B is 12A + 4B = I, where I is your income. You are currently consuming more than 27 units of B. In order to get 3 more units of A, how many units of B would you have to give up?

a. 0.33

b. 0.11

c. 3

d. 9

4.

Murphy used to consume 100 units of X and 50 units of Y when the price of X was $2 and the price of Y was $4. If the price of X rose to $4 and the price of Y rose to $9, how much would Murphy’s income have to rise so that he could still afford his original bundle?

a. $700

b. $450

c. $350

d. $1,050

5.

Charlie has the utility function U(xA, xB) = xAxB. His indifference curve passing through 15 apples and 16 bananas will also pass through the point where he consumes 3 apples and a. 40 bananas.

b. 83 bananas.

c. 20 bananas.

d. 87 bananas.

e. 80 bananas.

1

6.

Harmon’s utility function is U(x1, x2) = x1x2. His income is $100. The price of good 2 is p2 = 4. Good 1 is priced as follows. The first 15 units cost $4 per unit and any additional units cost $2 per unit. What consumption bundle does Harmon choose?

a. (12.5, 12.5)

b. (25, 12.5)

c. (12.5, 25)

d. (15, 10)

7.

Janet consumes x1 and x2 together in fixed proportions. She always consumes 2 units of x1 for every unit x2. One utility function that describes her preferences is

a. U(x1, x2) = 2x1x2.

b. U(x1, x2) = 2x1 + x2.

c. U(x1, x2) = x1 + 2x2.

d. U(x1, x2) = min{ 2x1, x2}.

e. U(x1, x2) = min{x1, 2x2}.

8.

Charlie’s utility function is U(A, B) = AB, where A and B are the numbers of apples and bananas, respectively, that he consumes. When Charlie is consuming 20 apples and 80 bananas, if we put apples on the horizontal axis and bananas on the vertical axis, the slope of his indifference curve at his current consumption is

a. –8.

b. –

.

c. –20.

d. –4.

e. –

.

9.

Wanda Littlemore’s utility function is U(x, y) = x + 47y – 3y2. Her income is $107. If the price of x is $1 and the price of y is $23, how many units of good x will Wanda demand? a. 11

b. 19

c. 0

d. 18

e. 15

10.

The prices of goods x and y are each $1. Jane has $20 to spend and is considering choosing 10 units of x and 10 units of y. Jane has nice convex preferences and more of each good is better for her. Where x is drawn on the horizontal axis and y is drawn on the vertical axis, the slope of her indifference curve at the bundle (10, 10) is –0.5.

a. The bundle (10, 10) is the best she can afford.

b. She would be better off consuming more of good x and less of good y. c. She would be better off consuming more of good y and less of good x. d. She must dislike one of the goods.

e. More than one of the above is true.

2

11.

Walt consumes strawberries and cream but only in the fixed ratio of three boxes of strawberries to two cartons of cream. At any other ratio, the excess goods are totally useless to him. The cost of a box of strawberries is $10 and the cost of a carton of cream is $10. Walt’s income is $200. a. Walt demands 10 cartons of cream.

b. Walt demands 10 boxes of strawberries.

c. Walt considers strawberries and cartons of cream to be perfect substitutes. d. Walt demands 12 boxes of strawberries.

12.

Natalie consumes only apples and tomatoes. Her utility function is U(x, y) = x2y8, where x is the number of apples consumed and y is the number of tomatoes consumed. Natalie’s income is $320, and the prices of apples and tomatoes are $4 and $3, respectively. How many apples will she consume? a. 21.33

b. 16

c. 8

d. 48

13.

If Charlie’s utility function were X6AXB and if apples cost 40 cents each and bananas cost 10 cents each, Charlie’s budget line would be tangent to one of his indifference curves whenever a. 6XB = 4XA.

b. XA = 6XB.

c. XB = XA.

d. XB = 6XA.

e. 40XA + 10XB = M.

14.

Twenty years ago, Dmitri consumed bread which cost him 10 kopeks a loaf and potatoes which cost him 18 kopeks a sack. With his income of 230 kopeks, he bought 5 loaves of bread and 10 sacks of potatoes. Today he has an income of 400 kopeks. Bread now costs him 20 kopeks a loaf and potatoes cost him 25 kopeks a sack. Assuming his preferences haven’t changed (and the sizes of loaves and sacks haven’t changed), when was he better off?

a. He was equally well off in the two periods.

b. He is better off today.

c. He was better off 20 years ago.

d. From the information given here, we are unable to tell.

15.

Jose consumes rare books which cost him 8 pesos each and pieces of antique furniture which cost him 10 pesos each. He spends his entire income to buy 9 rare books and 11 pieces of antique furniture. Nigel has the same preferences as Jose, but faces different prices and has a different income. Nigel has an income of 162 pounds. He buys rare books at a cost of 4 pounds each and pieces of antique furniture at a cost of 11 pounds each.

a. Nigel would prefer Jose’s bundle to his own.

b. Jose would prefer Nigel’s bundle to his own.

c. Neither would prefer the other’s bundle to his own.

d. Each prefers the other’s bundle to his own.

e. We can’t tell whether either would prefer the other’s bundle without knowing what quantities Nigel consumes.

3

16.

A student spends all of her income on pizza and books. When pizzas cost $3 each and books cost $10 each, she consumed 30 pizzas and 3 books per month. The price of pizzas fell to $2.90 each while the price of books rose to $11 each. The price change

a. made her worse off.

b. left her exactly as well off as before.

c. left her at least as well off as before and possibly helped her. d. might have helped her, might have harmed her. We can’t tell which unless we observe what she consumed after the price change.

e. had the same effect as a $3 increase in her income.

17.

Diana consumes commodities x and y and her utility function is U(x, y) = xy2. Good x costs $2 per unit and good y costs $1 per unit. If she is endowed with 3 units of x and 6 units of y, how many units of good y will she consume?

a. 11

b. 3

c. 8

d. 14

18.

Milton consumes two commodities in a perfect market system. The price of x is $5 and the price of y is $1. His utility function is U(x, y) = xy. He is endowed with 40 units of good x and no y. Find his consumption of good y.

a. 110

b. 105

c. 50

d. 100

19.

Rhoda takes a job with a construction company. She earns $5 an hour for the first 40 hours of each week and then gets “double-time” for overtime. That is, she is paid $10 an hour for every hour beyond 40 hours a week that she works. Rhoda has 70 hours a week available to divide between construction work and leisure. She has no other source of income, and her utility function is U = cr, where c is her income to spend on goods and r is the number of hours of leisure that she has per week. She is allowed to work as many hours as she wants to. How many hours will she work?

a. 50

b. 30

c. 45

d. 35

20.

Irene earns 8 dollars an hour. She has no nonlabor income. She has 30 hours a week available for either labor or leisure. Her utility function is U(c, r) = cr2, where c is dollars worth of goods and r is hours of leisure. How many hours per week will she work?

a. 8

b. 13

c. 15

d. 10

4

21.

Mario consumes eggplants and tomatoes in the ratio of 1 bushel of eggplants per 1 bushel of tomatoes. His garden yields 30 bushels of eggplants and 10 bushels of tomatoes. He initially faced prices of $25 per bushel for each vegetable, but the price of eggplants rose to $100 per bushel, while the price of tomatoes stayed unchanged. After the price change, he would

a. increase his eggplant consumption by 6 bushels.

b. decrease his eggplant consumption by at least 6 bushels.

c. increase his consumption of eggplants by 8 bushels.

d. decrease his consumption of eggplants by 8 bushels.

e. decrease his tomato consumption by at least 1 bushel.

22.

Mr. Cog has 18 hours per day to divide between labor and leisure. His utility function is U(C, R) = CR, where C is dollars per year spent on consumption and R is hours of leisure. If he has a nonlabor income of 40 dollars per day and a wage rate of 8 dollars per hour, he will choose a combination of labor and leisure that allows him to spend

a. 184 dollars per day on consumption.

b. 82 dollars per day on consumption.

c. 112 dollars per day on consumption.

d. 92 dollars per day on consumption.

e. 138 dollars per day on consumption.

23.

Harvey Habit has a utility function U(c1, c2) = min{c1, c2}, where c1 and c2 are his consumption in periods 1 and 2 respectively. Harvey earns $189 in period 1 and he will earn $63 in period 2. Harvey can borrow or lend at an interest rate of 10%. There is no inflation.

a. Harvey will save $60.

b. Harvey will borrow $60.

c. Harvey will neither borrow nor lend.

d. Harvey will save $124.

e. None of the above.

24.

Mr. O. B. Kandle has a utility function c1c2, where c1 is his consumption in period 1 and c2 is his consumption in period 2. He will have no income in period 2. If he had an income of $70,000 in period 1 and the interest rate increased from 10 to 17%,

a. his savings would not change but his consumption in period 2 would increase by an amount > $2,500.

b. his consumption in both periods would decrease.

c. his consumption in both periods would increase.

d. his savings would increase by 7% and his consumption in period 2 would also increase. e. His saving would not change but his consumption in period 2 would increase by an amount < $2,500

5

25.

Mandy has an income of $800 in period 1 and will have an income of $500 in period 2. Her utility function is U(c1, c2) = c0.801c0.202, where c1 is her consumption in period 1 and c2 is her consumption in period 2. The interest rate is .25. If she unexpectedly won a lottery which pays its prize in period 2 so that her income in period 2 would be $1,000 and her income in period 1 would remain $800, then her consumption in period 1 would

a. stay constant.

b. double.

c. increase by $320.

d. increase by $400.

e. increase by $320.

26.

Molly has income $200 in period 1 and income $920 in period 2. Her utility function is ca1c1–a2, where a = 0.80 and the interest rate is 0.15. If her income in period 1 doubled and her income in period 2 stayed the same, her consumption in period 1 would

a. increase by $160.

b. double.

c. increase by $80

d. stay constant.

e. increase by $200.

27.

Harvey Habit has a utility function U(c1, c2) = min{c1, c2}. If he had an income of $1,230 in period 1 and $615 in period 2 and if the interest rate were 0.05, how much would Harvey choose to spend in period 1? a. $1,860

b. $465

c. $1,395

d. $310

e. $930

28.

In an isolated mountain village, the harvest this year is 6,000 bushels of grain and the harvest next year will be 900 bushels. The villagers all have utility functions U(c1, c2) = c1c2, where c1 is consumption this year and c2 is consumption next year. Rats eat 40% of any grain that is stored for a year. How much grain could the villagers consume next year if they consume 1,000 bushels of grain this year? a. 5,850 bushels

b. 3,000 bushels

c. 3,900 bushels

d. 6,900 bushels

e. 1,000 bushels

6

29.

Ronald has $18,000. But he is forced to bet it on the flip of a fair coin. If he wins he has $36,000. If he loses he has nothing. Ronald’s expected utility function is .5x.5 + .5y.5, where x is his wealth if heads comes up and y is his wealth if tails comes up. Since he must make this bet, he is exactly as well off as if he had a perfectly safe income of

a. $16,000.

b. $15,000.

c. $12,000.

d. $11,000.

e. $9,000.

30.

Billy Pigskin has a von Neumann-Morgenstern utility function If Billy is not injured this

season, he will receive an income of $16 million. If he is injured, his income will be only $10,000. The probability that he will be injured is .1 and the probability that he will not be injured is .9. His expected utility is

a. 3,610.

b. between 15 million and 16 million.

c. 100,000.

d. 7,220.

e. 14,440.

31.

Willy’s only source of wealth is his chocolate factory. He has the utility function pc f + (1 – p)c nf, where p is the probability of a flood, 1 – p is the probability of no flood, and cf and cnf are his wealth contingent on a flood and on no flood, respectively. The probability of a flood is p = . The value of

Willy’s factory is $500,000 if there is no flood and $0 if there is a flood. Willy can buy insurance where if he buys $x worth of insurance, he must pay the insurance company $2 X 7 whether there is a flood or not but he gets back $x from the company if there is a flood. Willy should buy a. no insurance since the cost per dollar of insurance exceeds the probability of a flood. b. enough insurance so that if there is a flood, after he collects his insurance, his wealth will be

of what it would be if there were no flood.

c. enough insurance so that if there is a flood, after he collects his insurance, his wealth will be the same whether there was a flood or not.

d. enough insurance so that if there is a flood, after he collects his insurance, his wealth will be

of what it would be if there were no flood.

e. enough insurance so that if there is a flood, after he collects his insurance, his wealth will be

of what it would be if there were no flood.

32.

Yoram’s expected utility function is pc 1 + (1 – p)c 2, where p is the probability that he consumes c1 and 1 – p is the probability that he consumes c2. Yoram is offered a choice between getting a sure payment of $Z or a lottery in which he receives $2,500 with probability .30 and $3,600 with probability .70. Yoram will choose the sure payment if

a. Z > 3,249 and the lottery if Z < 3,249.

b. Z > 2,874.50 and the lottery if Z < 2,874.50.

c. Z > 3,600 and the lottery if Z < 3,600.

d. Z > 3,424.50 and the lottery if Z < 3,424.50.

e. Z > 3,270 and the lottery if Z < 3,270.

7

8

1.

If she spends all of her income on uglifruits and breadfruits, Maria can just afford 11 uglifruits and 4 breadfruits per day. She could also use her entire budget to buy 3 uglifruits and 8 breadfruits per day. The price of uglifruits is 6 pesos each. How much is Maria’s income per day? a. 115 pesos

b. 105 pesos

c. 114 pesos

d. 119 pesos

2.

Bella’s budget line for x and y depends on all of the following except a. the amount of money she has to spend on x and y.

b. the price of x.

c. her preferences between x and y.

d. the price of y.

3.

Your budget constraint for the two goods A and B is 12A + 4B = I, where I is your income. You are currently consuming more than 27 units of B. In order to get 3 more units of A, how many units of B would you have to give up?

a. 0.33

b. 0.11

c. 3

d. 9

4.

Murphy used to consume 100 units of X and 50 units of Y when the price of X was $2 and the price of Y was $4. If the price of X rose to $4 and the price of Y rose to $9, how much would Murphy’s income have to rise so that he could still afford his original bundle?

a. $700

b. $450

c. $350

d. $1,050

5.

Charlie has the utility function U(xA, xB) = xAxB. His indifference curve passing through 15 apples and 16 bananas will also pass through the point where he consumes 3 apples and a. 40 bananas.

b. 83 bananas.

c. 20 bananas.

d. 87 bananas.

e. 80 bananas.

1

6.

Harmon’s utility function is U(x1, x2) = x1x2. His income is $100. The price of good 2 is p2 = 4. Good 1 is priced as follows. The first 15 units cost $4 per unit and any additional units cost $2 per unit. What consumption bundle does Harmon choose?

a. (12.5, 12.5)

b. (25, 12.5)

c. (12.5, 25)

d. (15, 10)

7.

Janet consumes x1 and x2 together in fixed proportions. She always consumes 2 units of x1 for every unit x2. One utility function that describes her preferences is

a. U(x1, x2) = 2x1x2.

b. U(x1, x2) = 2x1 + x2.

c. U(x1, x2) = x1 + 2x2.

d. U(x1, x2) = min{ 2x1, x2}.

e. U(x1, x2) = min{x1, 2x2}.

8.

Charlie’s utility function is U(A, B) = AB, where A and B are the numbers of apples and bananas, respectively, that he consumes. When Charlie is consuming 20 apples and 80 bananas, if we put apples on the horizontal axis and bananas on the vertical axis, the slope of his indifference curve at his current consumption is

a. –8.

b. –

.

c. –20.

d. –4.

e. –

.

9.

Wanda Littlemore’s utility function is U(x, y) = x + 47y – 3y2. Her income is $107. If the price of x is $1 and the price of y is $23, how many units of good x will Wanda demand? a. 11

b. 19

c. 0

d. 18

e. 15

10.

The prices of goods x and y are each $1. Jane has $20 to spend and is considering choosing 10 units of x and 10 units of y. Jane has nice convex preferences and more of each good is better for her. Where x is drawn on the horizontal axis and y is drawn on the vertical axis, the slope of her indifference curve at the bundle (10, 10) is –0.5.

a. The bundle (10, 10) is the best she can afford.

b. She would be better off consuming more of good x and less of good y. c. She would be better off consuming more of good y and less of good x. d. She must dislike one of the goods.

e. More than one of the above is true.

2

11.

Walt consumes strawberries and cream but only in the fixed ratio of three boxes of strawberries to two cartons of cream. At any other ratio, the excess goods are totally useless to him. The cost of a box of strawberries is $10 and the cost of a carton of cream is $10. Walt’s income is $200. a. Walt demands 10 cartons of cream.

b. Walt demands 10 boxes of strawberries.

c. Walt considers strawberries and cartons of cream to be perfect substitutes. d. Walt demands 12 boxes of strawberries.

12.

Natalie consumes only apples and tomatoes. Her utility function is U(x, y) = x2y8, where x is the number of apples consumed and y is the number of tomatoes consumed. Natalie’s income is $320, and the prices of apples and tomatoes are $4 and $3, respectively. How many apples will she consume? a. 21.33

b. 16

c. 8

d. 48

13.

If Charlie’s utility function were X6AXB and if apples cost 40 cents each and bananas cost 10 cents each, Charlie’s budget line would be tangent to one of his indifference curves whenever a. 6XB = 4XA.

b. XA = 6XB.

c. XB = XA.

d. XB = 6XA.

e. 40XA + 10XB = M.

14.

Twenty years ago, Dmitri consumed bread which cost him 10 kopeks a loaf and potatoes which cost him 18 kopeks a sack. With his income of 230 kopeks, he bought 5 loaves of bread and 10 sacks of potatoes. Today he has an income of 400 kopeks. Bread now costs him 20 kopeks a loaf and potatoes cost him 25 kopeks a sack. Assuming his preferences haven’t changed (and the sizes of loaves and sacks haven’t changed), when was he better off?

a. He was equally well off in the two periods.

b. He is better off today.

c. He was better off 20 years ago.

d. From the information given here, we are unable to tell.

15.

Jose consumes rare books which cost him 8 pesos each and pieces of antique furniture which cost him 10 pesos each. He spends his entire income to buy 9 rare books and 11 pieces of antique furniture. Nigel has the same preferences as Jose, but faces different prices and has a different income. Nigel has an income of 162 pounds. He buys rare books at a cost of 4 pounds each and pieces of antique furniture at a cost of 11 pounds each.

a. Nigel would prefer Jose’s bundle to his own.

b. Jose would prefer Nigel’s bundle to his own.

c. Neither would prefer the other’s bundle to his own.

d. Each prefers the other’s bundle to his own.

e. We can’t tell whether either would prefer the other’s bundle without knowing what quantities Nigel consumes.

3

16.

A student spends all of her income on pizza and books. When pizzas cost $3 each and books cost $10 each, she consumed 30 pizzas and 3 books per month. The price of pizzas fell to $2.90 each while the price of books rose to $11 each. The price change

a. made her worse off.

b. left her exactly as well off as before.

c. left her at least as well off as before and possibly helped her. d. might have helped her, might have harmed her. We can’t tell which unless we observe what she consumed after the price change.

e. had the same effect as a $3 increase in her income.

17.

Diana consumes commodities x and y and her utility function is U(x, y) = xy2. Good x costs $2 per unit and good y costs $1 per unit. If she is endowed with 3 units of x and 6 units of y, how many units of good y will she consume?

a. 11

b. 3

c. 8

d. 14

18.

Milton consumes two commodities in a perfect market system. The price of x is $5 and the price of y is $1. His utility function is U(x, y) = xy. He is endowed with 40 units of good x and no y. Find his consumption of good y.

a. 110

b. 105

c. 50

d. 100

19.

Rhoda takes a job with a construction company. She earns $5 an hour for the first 40 hours of each week and then gets “double-time” for overtime. That is, she is paid $10 an hour for every hour beyond 40 hours a week that she works. Rhoda has 70 hours a week available to divide between construction work and leisure. She has no other source of income, and her utility function is U = cr, where c is her income to spend on goods and r is the number of hours of leisure that she has per week. She is allowed to work as many hours as she wants to. How many hours will she work?

a. 50

b. 30

c. 45

d. 35

20.

Irene earns 8 dollars an hour. She has no nonlabor income. She has 30 hours a week available for either labor or leisure. Her utility function is U(c, r) = cr2, where c is dollars worth of goods and r is hours of leisure. How many hours per week will she work?

a. 8

b. 13

c. 15

d. 10

4

21.

Mario consumes eggplants and tomatoes in the ratio of 1 bushel of eggplants per 1 bushel of tomatoes. His garden yields 30 bushels of eggplants and 10 bushels of tomatoes. He initially faced prices of $25 per bushel for each vegetable, but the price of eggplants rose to $100 per bushel, while the price of tomatoes stayed unchanged. After the price change, he would

a. increase his eggplant consumption by 6 bushels.

b. decrease his eggplant consumption by at least 6 bushels.

c. increase his consumption of eggplants by 8 bushels.

d. decrease his consumption of eggplants by 8 bushels.

e. decrease his tomato consumption by at least 1 bushel.

22.

Mr. Cog has 18 hours per day to divide between labor and leisure. His utility function is U(C, R) = CR, where C is dollars per year spent on consumption and R is hours of leisure. If he has a nonlabor income of 40 dollars per day and a wage rate of 8 dollars per hour, he will choose a combination of labor and leisure that allows him to spend

a. 184 dollars per day on consumption.

b. 82 dollars per day on consumption.

c. 112 dollars per day on consumption.

d. 92 dollars per day on consumption.

e. 138 dollars per day on consumption.

23.

Harvey Habit has a utility function U(c1, c2) = min{c1, c2}, where c1 and c2 are his consumption in periods 1 and 2 respectively. Harvey earns $189 in period 1 and he will earn $63 in period 2. Harvey can borrow or lend at an interest rate of 10%. There is no inflation.

a. Harvey will save $60.

b. Harvey will borrow $60.

c. Harvey will neither borrow nor lend.

d. Harvey will save $124.

e. None of the above.

24.

Mr. O. B. Kandle has a utility function c1c2, where c1 is his consumption in period 1 and c2 is his consumption in period 2. He will have no income in period 2. If he had an income of $70,000 in period 1 and the interest rate increased from 10 to 17%,

a. his savings would not change but his consumption in period 2 would increase by an amount > $2,500.

b. his consumption in both periods would decrease.

c. his consumption in both periods would increase.

d. his savings would increase by 7% and his consumption in period 2 would also increase. e. His saving would not change but his consumption in period 2 would increase by an amount < $2,500

5

25.

Mandy has an income of $800 in period 1 and will have an income of $500 in period 2. Her utility function is U(c1, c2) = c0.801c0.202, where c1 is her consumption in period 1 and c2 is her consumption in period 2. The interest rate is .25. If she unexpectedly won a lottery which pays its prize in period 2 so that her income in period 2 would be $1,000 and her income in period 1 would remain $800, then her consumption in period 1 would

a. stay constant.

b. double.

c. increase by $320.

d. increase by $400.

e. increase by $320.

26.

Molly has income $200 in period 1 and income $920 in period 2. Her utility function is ca1c1–a2, where a = 0.80 and the interest rate is 0.15. If her income in period 1 doubled and her income in period 2 stayed the same, her consumption in period 1 would

a. increase by $160.

b. double.

c. increase by $80

d. stay constant.

e. increase by $200.

27.

Harvey Habit has a utility function U(c1, c2) = min{c1, c2}. If he had an income of $1,230 in period 1 and $615 in period 2 and if the interest rate were 0.05, how much would Harvey choose to spend in period 1? a. $1,860

b. $465

c. $1,395

d. $310

e. $930

28.

In an isolated mountain village, the harvest this year is 6,000 bushels of grain and the harvest next year will be 900 bushels. The villagers all have utility functions U(c1, c2) = c1c2, where c1 is consumption this year and c2 is consumption next year. Rats eat 40% of any grain that is stored for a year. How much grain could the villagers consume next year if they consume 1,000 bushels of grain this year? a. 5,850 bushels

b. 3,000 bushels

c. 3,900 bushels

d. 6,900 bushels

e. 1,000 bushels

6

29.

Ronald has $18,000. But he is forced to bet it on the flip of a fair coin. If he wins he has $36,000. If he loses he has nothing. Ronald’s expected utility function is .5x.5 + .5y.5, where x is his wealth if heads comes up and y is his wealth if tails comes up. Since he must make this bet, he is exactly as well off as if he had a perfectly safe income of

a. $16,000.

b. $15,000.

c. $12,000.

d. $11,000.

e. $9,000.

30.

Billy Pigskin has a von Neumann-Morgenstern utility function If Billy is not injured this

season, he will receive an income of $16 million. If he is injured, his income will be only $10,000. The probability that he will be injured is .1 and the probability that he will not be injured is .9. His expected utility is

a. 3,610.

b. between 15 million and 16 million.

c. 100,000.

d. 7,220.

e. 14,440.

31.

Willy’s only source of wealth is his chocolate factory. He has the utility function pc f + (1 – p)c nf, where p is the probability of a flood, 1 – p is the probability of no flood, and cf and cnf are his wealth contingent on a flood and on no flood, respectively. The probability of a flood is p = . The value of

Willy’s factory is $500,000 if there is no flood and $0 if there is a flood. Willy can buy insurance where if he buys $x worth of insurance, he must pay the insurance company $2 X 7 whether there is a flood or not but he gets back $x from the company if there is a flood. Willy should buy a. no insurance since the cost per dollar of insurance exceeds the probability of a flood. b. enough insurance so that if there is a flood, after he collects his insurance, his wealth will be

of what it would be if there were no flood.

c. enough insurance so that if there is a flood, after he collects his insurance, his wealth will be the same whether there was a flood or not.

d. enough insurance so that if there is a flood, after he collects his insurance, his wealth will be

of what it would be if there were no flood.

e. enough insurance so that if there is a flood, after he collects his insurance, his wealth will be

of what it would be if there were no flood.

32.

Yoram’s expected utility function is pc 1 + (1 – p)c 2, where p is the probability that he consumes c1 and 1 – p is the probability that he consumes c2. Yoram is offered a choice between getting a sure payment of $Z or a lottery in which he receives $2,500 with probability .30 and $3,600 with probability .70. Yoram will choose the sure payment if

a. Z > 3,249 and the lottery if Z < 3,249.

b. Z > 2,874.50 and the lottery if Z < 2,874.50.

c. Z > 3,600 and the lottery if Z < 3,600.

d. Z > 3,424.50 and the lottery if Z < 3,424.50.

e. Z > 3,270 and the lottery if Z < 3,270.

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