3. I n a country called Acirema, there are three types of citizens: (1) people i

Question

3. I n a country called Acirema, there are three types of citizens: (1) people in jail who were caught committing crimes; (2) people who are "honest," that is, who did not commit a crime and are therefore not in jail; and (3) people who com- mitted crimes but who were not caught and are therefore not in jail (these are mostly politicians). Assume that the citizens of Acirema derive utility only from income (status and other factors mean nothing) and that they all have Von Neumann-Morgenstern utility functions. Also assume that this country pays a guaranteed income of S10,000 to each honest person and $1,000 to each crimi- nal in jail and that the value of committing a crime and not being caught is $13,000. Finally, assume that with the country's present police force, the proba- bility of being caught when committing a crime is 75% a) Can we deduce, without ambiguity, the shape of a criminal's utility function? If so, what shape does it have? Can we deduce the shape of an honest person's utility function? If so, what shape does it have? If we sell insurance to criminals to pay them an income if they get put in jail, will we have any business? Why or why no? b) c)

Explanation / Answer

a) Criminals are risk loving people and thus have convex utility function. this is because for risk loving certainity equivalent is greater than expected utility .

b) Yes, for honest person the shape of utility function is concave this is because honest persons are risk averse and doesn't want to take risk. For honest person certainity equivalent is less than expected utility.

c) No , because income from doing crime not being caught is much higher than income from being caught plus the insurance .

0

Related Questions

Navigate

• Browse (All)
• Browse 3
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.