Khalid has a utility function U = W1/2, where W is his wealth in millions of dollars and U is the utility he obtains from the wealth. In a game show, the host offers him a choice between (A) $4 million for sure, or (B) a gamble that pays $1 million with probability 0.6 and $9 million with probability 0.4. i. Graph Khalid’s utility function with the help of above utility function. Is he risk lover? Explain. ii. Does A or B choice offer Khalid a higher expected prize? Explain your reasoning with appropriate calculations. iii. Does A or B offer Khalid a higher expected utility? Again, show your calculations. iv. Should Jamal pick A or B choice? Why?
Khalid has a utility function U = W1/2, where W is his wealth in millions of dollars and U is the utility he obtains from the wealth. In a game show, the host offers him a choice between (A) $4 million for sure, or (B) a gamble that pays $1 million with probability 0.6 and $9 million with probability 0.4. i. Graph Khalid’s utility function with the help of above utility function. Is he risk lover? Explain. ii. Does A or B choice offer Khalid a higher expected prize? Explain your reasoning with appropriate calculations. iii. Does A or B offer Khalid a higher expected utility? Again, show your calculations. iv. Should Jamal pick A or B choice? Why?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Khalid has a utility function U = W1/2, where W is his wealth in millions of dollars
and U is the utility he obtains from the wealth. In a game show, the host offers
him a choice between (A) $4 million for sure, or (B) a gamble that pays $1
million with probability 0.6 and $9 million with probability 0.4.
i. Graph Khalid’s utility function with the help of above utility function. Is
he risk lover? Explain.
ii. Does A or B choice offer Khalid a higher expected prize? Explain your
reasoning with appropriate calculations.
iii. Does A or B offer Khalid a higher expected utility? Again, show your
calculations.
iv. Should Jamal pick A or B choice? Why?
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