A6 Page54) (a) Your utility function is U= M¹/2 and your initial wealth is 36. Will you accepta gamble in which you win 12 with probability 2/3 and lose 11 with probability1/3?(b) Consider a person with an initial wealth of 100 who faces a chance to win 20with probability and to lose 20 with probability 2. If this person's utilityfunction is U= M², how much should you have to compensate the person in orderfor her to not play the gamble?5) The game shown below is played repeatedly in an infinite number of periods.Both players maximize the present discounted value of theirpayoffs.LRT 4,4 2,12B 12,2 3,3(a) For the above game identify the Nash equilibrium of the static game.Does each player have a dominant strategy?(b) Now consider the following strategy in a repeated game. The twoplayers start by playing (T;L) in period 1. In periods t > 1 playersplay (T;L) if both players played (T;L) in all previous periods. Otherwise,players play (B;R). What is the lowest value of 'r' such thatthe cooperative equilibrium can be sustained?of 5OZOOM+wwwwwxx.com.com.com

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Answered: 4) (a) Your utility function is U- M¹/2…

4) (a) Your utility function is U- M¹/2 and your initial wealth is 36. Will you accept a gamble in which you win 12 with probability 2/3 and lose 11 with probability 1/3?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.7P

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Comparative Advantage and Absolute Advantage Analysis

The theory of absolute advantage was given by Adam Smith in the year 1776.

Question

Page
5
4) (a) Your utility function is U= M¹/2 and your initial wealth is 36. Will you accept
a gamble in which you win 12 with probability 2/3 and lose 11 with probability
1/3?
(b) Consider a person with an initial wealth of 100 who faces a chance to win 20
with probability and to lose 20 with probability 2. If this person's utility
function is U= M², how much should you have to compensate the person in order
for her to not play the gamble?
5) The game shown below is played repeatedly in an infinite number of periods.
Both players maximize the present discounted value of their
payoffs.
L
R
T 4,4 2,12
B 12,2 3,3
(a) For the above game identify the Nash equilibrium of the static game.
Does each player have a dominant strategy?
(b) Now consider the following strategy in a repeated game. The two
players start by playing (T;L) in period 1. In periods t > 1 players
play (T;L) if both players played (T;L) in all previous periods. Otherwise,
players play (B;R). What is the lowest value of 'r' such that
the cooperative equilibrium can be sustained?
of 5
O
ZOOM
+
wwwwwxx.com.com.com

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