12. A consumer who conforms to the von Neumann-Morgenstern axioms is faced with four situations A, B, C, and D. She prefers A to B, B to C, and C to D. Experimentation reveals that the consumer is indifferent between B and a lottery ticket with probabilities of 0.4 and 0.6 for A and D respectively, and that she is indifferent between C and a lottery ticket with probabilities of 0.2 and 0.8 for B and D respectively. Construct a set of von Neumann- Morgenstern utility numbers for the four situations.

12. A consumer who conforms to the von Neumann-Morgenstern axioms is faced with four situations A, B, C, and D. She prefers A to B, B to C, and C to D. Experimentation reveals that the consumer is indifferent between B and a lottery ticket with probabilities of 0.4 and 0.6 for A and D respectively, and that she is indifferent between C and a lottery ticket with probabilities of 0.2 and 0.8 for B and D respectively. Construct a set of von Neumann- Morgenstern utility numbers for the four situations.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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2. Christiaan can go hiking, or he can stay at home. Hiking would be fun if nothing bad happens, but there is a risk if he goes hiking that he will meet a bear (not fun) or get bitten by a snake (very not fun). Christiaan decides that if there is a 5% chance of meeting a bear and a 1% chance of getting bitten by a snake, he would prefer to go hiking rather than stay at home. However, if the chance of meeting a bear is 10% and the chance of a snake bite is 5%, he definitely would rather stay at home. then (a) Consider the utility function: U (stay home) = 25, U (hike no event) = 100, U (hike & snake) -1000, U (hike & bear) = -200. Does this utility function represent Christiaan's pref- erences? Explain. (b) Suppose that the utility function in (a) does represent Christiaan's preferences. Would Christiaan prefer to hike or stay home if the probability of meeting a bear is 6% and the probability of being bitten by a snake is 4%? Show your work.
Persons A and B are roommates. Person A smokes and Person B does not. The index s measures how smoky the room is. It varies from s=0, where there is no smoke in the room, to s=1, when the room is filled with smoke. Thus, 1-s measures how "clean" the air in the room is. Person A's utility function is UA(XA,S)=XA+In(1+s), where xA is the amount of money Person A owns. Person B's utility function is uB(XB,1s)%3D3XB+2(1-s), where Xg is the amount of money Person B owns. Each person starts with an endowment of 5 units of money. Persch B has the legal right to a smoke-free room and there is a market for "emission right." At the Walrasian equilibrium, what will be the (per unit of smoke index) price p of the emission rights if the price of money is 1? O a. None of the other answers. O b. p=2/3 O c. p=1 O d. p=3/2 О е. р31/6
Persons A and B are roommates. Person A smokes and Person B does not. The index s measures how smoky the room is. It varies from s=0, when there is no smoke in the room, to s=1, when the room is filled with smoke. Thus, 1-s measures how "clean" the air in the room is. Person A's utility function is ua(XA,s)=Xa.S, where xA is the amount of money Person A owns. Person B's utility function is ug(xg, 1s)=Xg .(1-s)³, where xg is the amount of money Person B owns. Each person starts with an endowment of 5 units of money. Person A has the legal right to a fill up the room with smoke and there exists a market for smoke "abatements". At the Walrasian equilibrium, how much money will person B be left with? а. Хв31.25 ОБ. Хв32.25 O c. XB=0.25 O d. Xg=0.25 е. None of the other answers.
An individual is oered a choice of either $50 or a lottery which may result in $0and $100, each with equal probability 1/2 . If the individual has a utility function u(w) = 5 + 2w, which one would they choose? If the individual has a utility function u(w) =w1/2 + 1?
1 pending
1. ) Suppose a driver has a 6% of having one accident a year. In case of an accident the value of the car is reduced from $25,000 to $5,000. If driver buys an insurance policy the insurance company would completely cover damage to the car (essentially restoring its value to its initial level). Assume that the driver's utility function is U = VW. a) If price of the insurance policy (premium) is $1500, would this driver be willing to purchase the policy? Explain Show you computations b) What would be the maximum price a driver with 10% chance of accident be willing to pay for the insurance policy?