Situation 1 Suppose you have won $1000 on a game show. In addition to these winnings, youare now asked to choose between Option A: 50% chance of winning $1000 and 50% chance of winning nothing Option B: winning $500 for sure. Situation 2 Suppose you have won $2000 on a game show. In addition to these winnings, youare now asked to choose between Option C: 50% chance of losing $1000 and 50% chance of losing nothing Option D: losing $500 for sure. They found that respondents are much more likely to choose Option B in the first case and Option C in the second case. Suppose the respondents are not indifferent between options. Show that their choices are inconsistent with the Expected Utility Theory.

Situation 1 Suppose you have won $1000 on a game show. In addition to these winnings, youare now asked to choose between Option A: 50% chance of winning $1000 and 50% chance of winning nothing Option B: winning $500 for sure. Situation 2 Suppose you have won $2000 on a game show. In addition to these winnings, youare now asked to choose between Option C: 50% chance of losing $1000 and 50% chance of losing nothing Option D: losing $500 for sure. They found that respondents are much more likely to choose Option B in the first case and Option C in the second case. Suppose the respondents are not indifferent between options. Show that their choices are inconsistent with the Expected Utility Theory.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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