Uncertainty and Risk - DARP
Uncertainty and Risk - DARP
Uncertainty and Risk - DARP
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Microeconomics CHAPTER 8. UNCERTAINTY AND RISK<br />
Exercise 8.15 In exercise 8.14, what would be the e¤ect on the contract if (i)<br />
Bill were risk neutral; (ii) Alf risk neutral?<br />
Outline Answer:<br />
In case (i) Bill’s indi¤erence curves become lines with slope [1 ] = <strong>and</strong><br />
the optimum is at E in Figure 8.5. In case (ii) Alf’s indi¤erence curves become<br />
lines with slope [1 ] = <strong>and</strong> the optimum is at the endowment point D.<br />
b<br />
x RED<br />
a<br />
x BLUE<br />
0 b<br />
•<br />
E<br />
R 2<br />
D•<br />
0 a<br />
b<br />
x BLUE<br />
R 1<br />
Figure 8.5: Optimal contract: risk-neutral buyer<br />
cFrank Cowell 2006 136
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