Asked by Arber Gashi on May 17, 2024
Verified
Quincy's expected utility function is pc1/21 (1 p) c1/22, where p is the probability that he consumes c1 and 1 p is the probability that he consumes c2.Wilbur is offered a choice between getting a sure payment of $Z or a lottery in which he receives $3,600 with probability .60 and $12,100 with probability .40.Wilbur will choose the sure payment if
A) Z 6,400 and the lottery if Z 6,400.
B) Z 12,100 and the lottery if Z 12,100.
C) Z 9,250 and the lottery if Z 9,250.
D) Z 5,000 and the lottery if Z 5,000.
E) Z 7,000 and the lottery if Z 7,000.
Expected Utility Function
A concept in economics that quantifies an individual's preference for different outcomes, accounting for risk and uncertainty.
Probability
A numeric expression ranging between 0 and 1 that signifies the chances of an event's occurrence.
Utility
The total satisfaction received from consuming a good or service.
- Compute the anticipated value of a wager and contrast it with definitive outcomes to select rational decisions.
- Clarify the idea of the certainty equivalent and its association with risk preferences.
Verified Answer
CB
Caitlin BakerMay 21, 2024
Final Answer :
A
Explanation :
The expected value of the lottery is calculated as (0.60 * $3,600) + (0.40 * $12,100) = $6,400. Wilbur will choose the sure payment if it is greater than the expected value of the lottery ($6,400) and the lottery if the sure payment is less than $6,400.
Learning Objectives
- Compute the anticipated value of a wager and contrast it with definitive outcomes to select rational decisions.
- Clarify the idea of the certainty equivalent and its association with risk preferences.