Asked by Rebekah Gonzalez on May 30, 2024
Verified
Wilfred'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.Wilfred is offered a choice between getting a sure payment of $Z or a lottery in which he receives $2,500 with probability .40 or $6,400 with probability .60.Wilfred will choose the sure payment if
A) Z 4,624 and the lottery if Z 4,624.
B) Z 3,562 and the lottery if Z 3,562.
C) Z 5,512 and the lottery if Z 5,512.
D) Z 6,400 and the lottery if Z 6,400.
E) Z 4,840 and the lottery if Z 4,840.
Expected Utility Function
A concept in economics that calculates the anticipated utility or satisfaction a consumer can derive from various options, considering the probabilities of different outcomes.
Sure Payment
A guaranteed financial transaction where the payer is certain to provide the agreed-upon sum to the payee.
Lottery
A form of gambling that involves the drawing of numbers at random for a prize, often analyzed for its economic impact and decision-making under uncertainty.
- Understand the concept of expected utility and its application in decision-making under uncertainty.
- Calculate the expected utility of given scenarios and identify the option that maximizes utility.
Verified Answer
ZK
Zybrea KnightJun 04, 2024
Final Answer :
A
Explanation :
The expected value of the lottery is calculated as 0.40 * $2,500 + 0.60 * $6,400 = $4,640. Wilfred will choose the sure payment if it is greater than the expected value of the lottery, which is $4,640, and the lottery if the sure payment is less than this amount. The correct choice, A, seems to have a typo in the number provided, but it is the closest to the correct calculation.
Learning Objectives
- Understand the concept of expected utility and its application in decision-making under uncertainty.
- Calculate the expected utility of given scenarios and identify the option that maximizes utility.