Suppose a decision maker has a utility function u(x) x1/3.We flip a fair coin and receive $10 for heads and $0 for tails. a Using expected utility theory, determine the cer-tainty equivalent of this lottery. b Using ( p) 1.89799p 3.55995p2 2.662549p3 , use prospect theory to determine the cer-tainty equivalent of the lottery. c Intuively explain why your answer in part (b) issmaller than your answer in part (a).d What implications does this problem have for the method used in Section 13.2 to estimate a person’s util-ity function?
Contingency Table
A contingency table can be defined as the visual representation of the relationship between two or more categorical variables that can be evaluated and registered. It is a categorical version of the scatterplot, which is used to investigate the linear relationship between two variables. A contingency table is indeed a type of frequency distribution table that displays two variables at the same time.
Binomial Distribution
Binomial is an algebraic expression of the sum or the difference of two terms. Before knowing about binomial distribution, we must know about the binomial theorem.
Suppose a decision maker has a utility
1/3.
We flip a fair coin and receive $10 for heads and $0 for tails.
a Using expected utility theory, determine the cer-
tainty equivalent of this lottery.
b Using
( p) 1.89799p 3.55995p2
2.662549p3
, use prospect theory to determine the cer-
tainty equivalent of the lottery.
c Intuively explain why your answer in part (b) is
smaller than your answer in part (a).
d What implications does this problem have for the
method used in Section 13.2 to estimate a person’s util-
ity function?
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