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Economics

The population of a town in California is made up of people of two professions: fifty prospectors and fifty streamers. Prospectors dig for gold, and streamers buy stakes in the possible finds. Everyone in town has the same utility of owning gold: U = 2 ln x

a) If a prospector is lucky, he discovers 200 ounces of gold. If he is unlucky, he discovers 10 ounces. Prospector is lucky 40% of the days. If there are many prospectors in the town, what is the expected find for a prospector?

b) Calculate the utility of a prospector on a good day and on a bad day. What is the expected utility for a prospector in the town?

c) A multitude of streamers deals with a multitude of prospectors in the town. Thus, the daily stream of gold for a streamer is equal to the expected find of a prospector. Calculate the utility of the daily stream.

d) What is the minimum price a prospector charges a streamer for the stream of gold?

To find that, remember that the prospector must at least retain his expected utility. Using his utility function, find the certainty (no-gamble) equivalent of the expected utility. That is the minimum price in gold ounces. Maximum price in ounces is capped by streamer's daily stream.

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Microeconomics, Economics

Category:- Microeconomics
Reference No.:- M91228368

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