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Problem Set 3

Problem Set 3

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Published by Tom Holden
The third problem set, on the VCG mechanism, intertemporal choice and adverse selection.
The third problem set, on the VCG mechanism, intertemporal choice and adverse selection.

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Published by: Tom Holden on Mar 14, 2013
Copyright:Attribution Non-commercial

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11/03/2014

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Problem Set 3: Public goods (continued), inter-temporal choice andadverse selection
1
. Suppose people’s preferences are as given in the table below:
 
Voter Option A Option B Option C1
70 40 20
2
10 80 30
3
40 20 80
Total
120 140 130a) Under the VCG mechanism, which option will be chosen?b) Which voter(s) are pivotal?c) What fees would each agent have to pay under the VCG mechanism?2. When Hollywood stars Burt Reynolds and Loni Anderson were getting divorced Ms. Andersonreportedly asked Mr Reynolds for a settlement of either
$15
million or
$75,000
a month for the restof her life. Explain how Mr. Reynolds
financial advisor should go about advising him, showing someexample calculations.3. Molly has an income of 
£400
in period
1
and an income of 
£500
in period
2
. Suppose her utilityfunction is
.
.
and the interest rate is
10%
.a) How much would she choose to consume in each period?b) How would her choices change if her income in period
1
halved and her income in period
2
stayedthe same?c) What happens to her choices if interest rates increase?

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