Problem Set 6 Fall 2013 Econ 300 Due Date December 10th Please return your answers in legible handwriting Do don t forget to write your NAME and University ID Please show your work you will be awarded partial credit for coherent attempts but no credit will be granted for unjustified correct answers 1 Calculate Pratt s risk aversion for the following functions a b c at at at 2 A wealthy individual has hired you to analyze an investment project The project consists on building a luxurious hotel for a total cost of 500 million The project is going to be a total success with probability 30 a mild success with probability 60 and a total failure with probability of 10 The hotel will run for a hundred years If a total success the hotel is going to produce 60 million a year if a mild success 50 million a year and only 30 million a year if it fails The interest rate is 10 Let be the total wealth in present value of this individual in millions The total wealth of this individual before hotel is 600 million If the utility function of this individual is should he build the hotel If the utility function of this individual is should he build the hotel a b 3 Consider the following game L R U 1 1 1 1 D 1 1 1 1 Is there a dominant strategy Is there a never best response strategy a b c Find all pure strategy Nash Equilibria d Find all mixed strategy Nash Equilibria axuxe 10x 2 lnuxx 15x 5 uxx 7x x uxx lnuxx
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