a
Choosing of Gamble A or B
a
Answer to Problem 17.9P
P will choose Gamble B.
Explanation of Solution
Given Information:
Reference point = $10000
Gain = 1 util per dollar
Loss = 2 util per dollar
Given the initial reference point of $10,000 and utility function of P, P will choose that gamble which gives him the highest expected utility (EU).
Since
Introduction:
Expected utility is the satisfaction which will be achieved after consumption of certain goods and services. It is estimated utility.
b)
Chosing between Gamble C or D.
b)
Answer to Problem 17.9P
P will choose Gamble C.
Explanation of Solution
Given Information:
Starting bonus = $100
Offer given by gamble Con winning is $150 and on losing is $200
Gamble D loss = $70
If $100 bonus is included along with the initial worth of $10,000, then the initial reference point for P will be $10,000.Given the utility function of P, P will choose that gamble which gives him the highest expected utility (EU).
Since,
If $100 bonus is considered as a winning amount which P will get from the gambles, then his initial reference point becomes $10,000. In this case
Since
Introduction:
Expected utility is the satisfaction which will be achieved after consumption of certain goods and services. It is estimated utility.
c)
Whether choice made by P are same for choosing gamble.
c)
Answer to Problem 17.9P
P will prefer Gamble A over Gamble B and in the second scenario his preference remains the same, that is, he prefers Gamble C over Gamble D.
Explanation of Solution
Given Information:
Reference point = $10000
Gain = 1 util per dollar
Loss = 2 util per dollar
No, P choice would not be the same in the first scenario if he would have based his choice on final wealth level (EV) which he will get from gamble. However, his preference will remain the same in the second scenario. Let us see
Thus, it is seen that in the first scenario, P will prefer Gamble A over Gamble B and in the second scenario his preference remains the same, that is, he prefers Gamble C over Gamble D.
Introduction:
Expected utility is the satisfaction which will be achieved after consumption of certain goods and services. It is estimated utility.
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Chapter 17 Solutions
EBK INTERMEDIATE MICROECONOMICS AND ITS
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