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10/24/2012

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Final Exam
Econ 382, Professor Platt, BYUDecember 19th, 2008
Name:
Instructions
You have 180 minutes to complete this exam. No books, notes, or other references maybe used. Simple functions on calculators may be used, but should not be needed. Rulersand colored pens or pencils are permitted. Please do not use red.The questions are arranged roughly in order of point value, with the most importantconcepts being given the highest point values. Focus on completing the highest pointquestions correctly before moving on.For particular question types, follow these instructions:1.
Set Up
— For the speciﬁed environment, deﬁne the elements need for a solutionto the problem. Provide the maximization problem(s) for each agent, as well as anyadditional conditions required for equilibrium. No discussion or solution is necessary.2.
Solve
— Provide the information requested in
Set Up
questions, then completelysolve the problem. Be sure to compute all variables in equilibrium (including pricesand each quantity). No discussion is necessary.3.
Illustrate
Provide an appropriate graph to represent the concept requested. Thisshould be accompanied by two or three brief sentences explaining how the graphreﬂects the concept.4.
Correct
— The provided statements have errors or omissions in them. When youﬁnd an error, explain why the claim is false. If there is an omission, insert any neededconditions and explain why they are necessary. No problem should need more thantwo sentences of explanation.5.
Discuss
— Succinctly analyze the provided topic. One should be able to do this inthree to four carefully thought-out sentences.1
1-16 F0817-31 W0918-42 F099-16 F0824-30 W091

1. (4 pts) —
Correct:
The expected payoﬀ (or value) of a gamble indicates how mucha person is willing to pay to accept the gamble.2. Alex has just had an auto accident and the other party (Bob) is refusing to pay forit. Alex will take Bob to court, but he ﬁgures there is only a 40% chance of winning.Alex’s current wealth is \$2,500, and if he wins in court, he will be given an additional\$7,500. If he loses in court, his wealth is unchanged. His vN-M preferences are
(
) =
, where
is total wealth.(a) (4 pts) —
Solve:
Calculate Alex’s expected payoﬀ and expected utility in thissituation. Moreover, suppose Alex sees an ad in which a ﬁrm oﬀers to pay him \$Cupfront (the ﬁrm collects the \$7,500 if Alex wins). What is the smallest amount\$C the ﬁrm can oﬀer while still getting Alex to accept?(b) (5 pts) —
Illustrate
the previous two parts in a graph, indicating the size of risk premium Alex is willing to pay for the upfront payout.2
1-16 F0817-31 W0918-42 F099-16 F0824-30 W092

3. (3 pts) —
Discuss
the diﬀerence between a typical good versus a state-contingentgood. In particular, consider the sale of the good and when it is delivered, and explainthe usefulness of state-contingent goods.4. (3 pts)
Correct:
If insurance markets are perfectly competitive, agents will alwaysfully smooth their consumption across all states.5. (4 pts) —
Set up:
Suppose congress is going to provide \$100 million for a museumin either Salt Lake or Provo (not both), but it is still uncertain as to which; bothexpect a 30% chance that Provo will get it. Both cities are risk averse, with utilityfunction ln(
w
i
). The mayors of the two cities then consider trading state-contingentgoods. Set up the maximization problem for both Provo and Salt Lake, as well asmarket clearing conditions.3
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