ECON305.
Advanced Microeconomics
Oleg Rubanov
Problem Set 3
Problem 1
Imagine a situation, where it is believed that 5% of the population are infected with
the coronavirus. There is a PCR test available with sensitivity 95% (probability that
the person tests positive if she/he is infected) and specificity 99% (probability that the
person tests negative if she/he is not infected) if perfectly executed (the nurse taking the
test properly swabs the nose and the throat and everyone follows all the protocol). A
randomly chosen person takes this PCR test. Answer the questions below assuming that
the swab is taken perfectly.
For convenience, introduce notation for all the things mentioned above.
1
• I - person is infected, P(I) = 5% = 20
.
• N - person is not infected P(N ).
19
• + - person tests positive P(+|I) = 0.95 = 20
.
99
• − - person tests negative P(−|N ) = 0.99 = 100
.
1. What is the probability that a randomly chosen person tests positive?
2. What is the probability that a randomly chosen person tests negative?
3. A randomly chosen person tests positive. What is the probability that she/he is
infected?
4. A randomly chosen person tests negative. What is the probability that she/he is
infected?
Now, assume that the swab is only taken properly 50% of the time (independent of
whether the person is sick or not). If the swab is done properly, then the probabilities are
as described above. However, if the swab is done improperly (which also happens with
probability 50%), then it always comes out negative. Denote the event of a proper swab S
and improper swab W , then P(S) = P(W ) = P(S|I) = P(S|N ) = P(W |I) = P(W |N ) =
0.5. With these assumptions in mind, answer the following questions.
5. What is the probability that a randomly chosen person tests positive?
6. What is the probability that a randomly chosen person tests negative?
7. A randomly chosen person tests positive. What is the probability that she/he is
infected?
8. A randomly chosen person tests negative. What is the probability that she/he is
infected?
1
Problem 2
Let the state set be Ω = {ω0 , ω1 }, the action set be A = {a0 , a1 }, and the agent’s utility
function u (a, ω) be
a = a0 a = a1
ω = ω0 −1 3 .
ω = ω1 1 2
What is an optimal decision as the function of the probability π = Pr (ω = ω1 )? What is
the expected utility as the function of this probability? Illustrate.
Answer the same questions for the following matrix:
a = a0 a = a1
ω = ω0 0 2 .
ω = ω1 3 1
Problem 3
Let the set of states be Ω = {ω0 , ω1 } with the uniform prior belief, µ0 = (1/4, 3/4), so
that P (ω = ω0 ) = 14 , P (ω = ω1 ) = 34 . Consider the following experiment E:
s = s0 s = s1 s = s2
ω = ω0 1/2 1/4 1/4 .
ω = ω1 1/3 1/2 1/6
Calculate the probability of observing each signal P (s), the posterior beliefs after observ-
ing them µs , and confirm that the belief evolution forms a martingale.
Problem 4
Your volleyball team can either be good quality or bad quality (your prior belief is that
the two qualities are equally likely). Your team plays once a week. You do not know the
quality of the opponents, but if your team is strong, you win with probability 23 each week
(independently of the other weeks). If your team is weak, then you win with probability 13
each week (independently of the other weeks). There are no draws in volleyball.
1. What is your belief about the quality of your team after 1 week, depending on your
performance?
2. What is your belief about the quality of your team after 2 weeks, depending on your
performance?
3. What is your belief about the quality of your team after T weeks, depending on
your performance?