ECON 701 Midterm: 701_aug2014
Document Summary
This exam has 4 questions and a total of 100 points. Answer each question in a separate exam book. If you need to make additional assumptions, state them clearly. Good luck: (25 pts) there are two possible states of the world and one good, (cid:147)money(cid:148). It is commonly known that state s will occur with probability (cid:25)s > 0; for s = 1; 2: a state contingent allocation is a pair (x1; x2) 2 r2. Consider a consumer who has a complete, transitive, and strongly monotonic ordering % over these allocations. Assume % is convex. (a) (10 pt) prove or disprove: this consumer must be weakly risk averse. (b) (15 pts) do the same as in (a), but under the assumption now that the consumer satis(cid:133)es the expected utility hypothesis. Assume n (cid:21) 2 and #x (cid:21) 3: let r be the set of complete and transitive binary relations on x: one alternative, s 2 x; is the status quo.
