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Consider the following two gambles: Option A: you win $50 with probability 0.75 and lose $100 with probability 0.25. Option B: You win $100 with probability 0.25 and lose $50 with probability 0.75. Which option is preferred according to expected utility if i) You use an exponential utility function with R=5 ii) You use an exponential utility function with R=10 iii) You use an exponential utility function with R=100 iv) You use an exponential utility function with R=1000 v) You use an exponential utility function with R=10,000

Consider the following two gambles: Option A: you win $50 with probability 0.75 and lose $100 with probability 0.25. Option B: You win $100 with probability 0.25 and lose $50 with probability 0.75. Which option is preferred according to expected utility if i) You use an exponential utility function with R=5 ii) You use an exponential utility function with R=10 iii) You use an exponential utility function with R=100 iv) You use an exponential utility function with R=1000 v) You use an exponential utility function with R=10,000

Microeconomic Theory
Microeconomic Theory
12th Edition
ISBN:9781337517942
Author:NICHOLSON
Publisher:NICHOLSON
Chapter7: Uncertainty
Section: Chapter Questions
Problem 7.3P
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3) Consider the following two gambles: Option A: you win $50 with probability 0.75 and lose $100 with probability 0.25. Option B: You win $100 with probability 0.25 and lose $50 with probability 0.75. Which option is preferred according to expected utility if i) You use an exponential utility function with R=5 ii) You use an exponential utility function with R=10 iii) You use an exponential utility function with R=100 iv) You use an exponential utility function with R=1000 v) You use an exponential utility function with R=10,000
Transcribed Image Text:3) Consider the following two gambles: Option A: you win $50 with probability 0.75 and lose $100 with probability 0.25. Option B: You win $100 with probability 0.25 and lose $50 with probability 0.75. Which option is preferred according to expected utility if i) You use an exponential utility function with R=5 ii) You use an exponential utility function with R=10 iii) You use an exponential utility function with R=100 iv) You use an exponential utility function with R=1000 v) You use an exponential utility function with R=10,000
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