CENGAGE MINDTAPNews Analysis: Go for the Video BonusWhile spending the weekend in New York City, Andrew, Beth, and their son, Darnell, are lucky enough to hail the Cash Cab for their taxi ride. Duringtheir ride, they win $100 for correct answers and receive only one strike for a wrong answer, so at the end of the ride they are eligible for the videobonus question. Their vacation budget before entering the cab was $400, and based on their understanding of the type of bonus question they'll beasked, they believe they have a 70% chance of getting the question right. As explained in the article, if they answer the video bonus questioncorrectly, they will double their winnings, but if they miss the video bonus question, they will lose all of what they had previously won. Alternatively,they can choose not to play for the bonus and walk away with their winnings from the cab ride.The following graph shows the cab riders' utility as a function of their total vacation budget. For simplicity, assume that all three passengers have thesame preferences, and they only care about their joint budget since they are a family. Refer to the graph to answer the questions that follow.1098u(x)6.4.1100200300 4005006007008009001000VACATION BUDGET (Dollars)UTILITY (Utils) If the family chooses not to do the video bonus question, they will receive a utility ofTo determine whether they should attempt the video bonus question, you first have to examine the payoffs the family will receive, depending onwhether they get the video bonus question correct or incorrect.Complete the following table with the total vacation budget they will have in each situation and the utilities corresponding to each outcome.Vacation BudgetUtility(Dollars)(Utils)Answer correctlyAnswer incorrectlyBecause the passengers believe they have 'a 70% chance of getting the question correct, their expected utility from taking the gamble isutils. (Note: Enter all decimal places, and do not round your answer.)Because the expected utility from taking the gamble isthan the utility they receive if they do not do the video bonus question, Andrew,Beth, and Darnellv do the video bonus question.Suppose that the odds that passengers get the video bonus question right increase with the number of people they have in the cab and decrease withthe number of strikes they received during their trip. If only Andrew and Beth had been in the cab, and they had received two strikes during the trip,they would have estimated their chance of getting the video bonus question right to be only 30%.

Since it is not clear from the graph what is the exact utility at some points, for example at…

If the family chooses not to do the video bonus question, they will receive a utility of To determine whether they should attempt the video bonus question, you first have to examine the payoffs the family will receive, depending on whether they get the video bonus question correct or incorrect. Complete the following table with the total vacation budget they will have in each situation and the utilities corresponding to each outcome. Vacation Budget Utility (Dollars) (Utils) Answer correctly Answer incorrectly Because the passengers believe they have a 70% chance of getting the question correct, their expected utility from taking the gamble is utils. (Note: Enter all decimal places, and do not round your answer.) Because the expected utility from taking the gamble is than the utility they receive if they do not do the video bonus question, Andrew, Beth, and Darnell v do the video bonus question.

If the family chooses not to do the video bonus question, they will receive a utility of To determine whether they should attempt the video bonus question, you first have to examine the payoffs the family will receive, depending on whether they get the video bonus question correct or incorrect. Complete the following table with the total vacation budget they will have in each situation and the utilities corresponding to each outcome. Vacation Budget Utility (Dollars) (Utils) Answer correctly Answer incorrectly Because the passengers believe they have a 70% chance of getting the question correct, their expected utility from taking the gamble is utils. (Note: Enter all decimal places, and do not round your answer.) Because the expected utility from taking the gamble is than the utility they receive if they do not do the video bonus question, Andrew, Beth, and Darnell v do the video bonus question.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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