Chapter 6: Rational Choice under Risk & Uncertainty Behavioral & Experimental Econ 2) Suppose you are considering taking the train (at a cost of $50) or driving your car (at a cost of $10) but you do not have the money to pay for car insurance. If you are caught driving your car without insurance, you will receive a $1,000 ticket. a. What will you choose if you are maximax (optimistic) decision-maker? b. What will you choose if you are a maximin (pessimistic) decision-maker? c. What will you choose if you are a minimax risk (regret) decision-maker? d. What will you choose if you estimate that there is a 2% chance of being caught driving without insul and you make your decision based on expected value? e. Determine the probability of detection that would make you indifferent between taking the train or work (still from the perspective of expected value). f. Returning to part (b), you now want to analyze your decision with a maximin decision criterion fran but also using an expected utility perspective, where your utility function is best described by u(x)= What will you choose now? g. Returning to the 2% chance of detection from part (d), you now want to analyze your decision from expected utility perspective where your utility function is best described by u(x)=√x. What will you if you are seeking to maximize expected utility?
Chapter 6: Rational Choice under Risk & Uncertainty Behavioral & Experimental Econ 2) Suppose you are considering taking the train (at a cost of $50) or driving your car (at a cost of $10) but you do not have the money to pay for car insurance. If you are caught driving your car without insurance, you will receive a $1,000 ticket. a. What will you choose if you are maximax (optimistic) decision-maker? b. What will you choose if you are a maximin (pessimistic) decision-maker? c. What will you choose if you are a minimax risk (regret) decision-maker? d. What will you choose if you estimate that there is a 2% chance of being caught driving without insul and you make your decision based on expected value? e. Determine the probability of detection that would make you indifferent between taking the train or work (still from the perspective of expected value). f. Returning to part (b), you now want to analyze your decision with a maximin decision criterion fran but also using an expected utility perspective, where your utility function is best described by u(x)= What will you choose now? g. Returning to the 2% chance of detection from part (d), you now want to analyze your decision from expected utility perspective where your utility function is best described by u(x)=√x. What will you if you are seeking to maximize expected utility?
Chapter1: Making Economics Decisions
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Transcribed Image Text:Chapter 6: Rational Choice under Risk & Uncertainty
Behavioral & Experimental Econ
2) Suppose you are considering taking the train (at a cost of $50) or driving your car (at a cost of $10)
but you do not have the money to pay for car insurance. If you are caught driving your car without
insurance, you will receive a $1,000 ticket.
a. What will you choose if you are maximax (optimistic) decision-maker?
b. What will you choose if you are a maximin (pessimistic) decision-maker?
c. What will you choose if you are a minimax risk (regret) decision-maker?
d. What will you choose if you estimate that there is a 2% chance of being caught driving without insur
and you make your decision based on expected value?
e. Determine the probability of detection that would make you indifferent between taking the train or
work (still from the perspective of expected value).
f. Returning to part (b), you now want to analyze your decision with a maximin decision criterion fran
but also using an expected utility perspective, where your utility function is best described by u(x)=
What will you choose now?
g. Returning to the 2% chance of detection from part (d), you now want to analyze your decision from
expected utility perspective where your utility function is best described by u(x)=√x. What will you
if you are seeking to maximize expected utility?
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