Microeconomics Theory 3 (ECO 641) Instructor: Dr.

Naved Ahmad
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Assignment 3 Due Date: 12 November, 2013

Q1. Explain Ellsberg Paradox.

Microeconomics Theory 3 (ECO 641) Instructor: Dr. Naved Ahmad

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Assignment 3 Due Date: 12 November, 2013

Q2. Suppose a consumer initially has monetary wealth W. There is some probability that he will lose an amount L. The consumer can purchase insurance that will pay him Q dollar in the event that he incurs this loss. The amount of money that he has to pay for Q dollars of insurance coverage is nQ. Here n is the premium per dollar of coverage. How much coverage will the consumer purchase?

Microeconomics Theory 3 (ECO 641) Instructor: Dr. Naved Ahmad

th

Assignment 3 Due Date: 12 November, 2013

Q3. The expected utility Theorem also holds for continuous probability distributions. If P(x) is a probability density function defined on outcome x. write the expected utility of this gamble.

Microeconomics Theory 3 (ECO 641) Instructor: Dr. Naved Ahmad

th

Assignment 3 Due Date: 12 November, 2013

Q4. Write down the Absolute /Relative risk aversion coefficients for the following utility functions:1. 2. 3. ( ) ( ) ( )

Microeconomics Theory 3 (ECO 641) Instructor: Dr. Naved Ahmad

th

Assignment 3 Due Date: 12 November, 2013

Q5. If a VNM utility function displays Constant absolute risk aversion so that Ra(w) = for all w, what functional form must it have?