Choosing of Gamble A or B

Question

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Answer 1

Question

Chapter 17, Problem 17.9P

a

To determine

Choosing of Gamble A or B

a

Expert Solution

Answer to Problem 17.9P

P will choose Gamble B.

Explanation of Solution

Given Information:

Reference point = $10000

Gain = 1 util per dollar

Loss = 2 util per dollar

Given the initial reference point of $10,000 and utility function of P, P will choose that gamble which gives him the highest expected utility (EU).

EUA=10,000+(12)(250)−(12)(2)(100) =10,000+125−(12)(200) =10,000+125−100 =10,025 utilsEUB=10,000+30 =10,030 utils

Since EUB=10,030utils>EUA=10,025utils , therefore P will choose Gamble B.

Economics Concept Introduction

Introduction:

Expected utility is the satisfaction which will be achieved after consumption of certain goods and services. It is estimated utility.

b)

To determine

Chosing between Gamble C or D.

b)

Expert Solution

Answer to Problem 17.9P

P will choose Gamble C.

Explanation of Solution

Given Information:

Starting bonus = $100

Offer given by gamble Con winning is $150 and on losing is $200

Gamble D loss = $70

If $100 bonus is included along with the initial worth of $10,000, then the initial reference point for P will be $10,000.Given the utility function of P, P will choose that gamble which gives him the highest expected utility (EU).

EUC=10,100+(12)(150)−(12)(2)(200) =10,100+75−(12)(400) =10,100+75−200 =9,975 utilsEUD=10,100−(2)(70) =10,100−140 =9,960 utils

Since, EUC=9,975 utils>EUD=9,960 utils therefore P will choose Gamble C.

If $100 bonus is considered as a winning amount which P will get from the gambles, then his initial reference point becomes $10,000. In this case

Since EUC=9,925 utils>EUD=9,860 utils , therefore P choice will remain the same and will choose Gamble C.

Economics Concept Introduction

Introduction:

Expected utility is the satisfaction which will be achieved after consumption of certain goods and services. It is estimated utility.

c)

To determine

Whether choice made by P are same for choosing gamble.

c)

Expert Solution

Answer to Problem 17.9P

P will prefer Gamble A over Gamble B and in the second scenario his preference remains the same, that is, he prefers Gamble C over Gamble D.

Explanation of Solution

Given Information:

Reference point = $10000

Gain = 1 util per dollar

Loss = 2 util per dollar

No, P choice would not be the same in the first scenario if he would have based his choice on final wealth level (EV) which he will get from gamble. However, his preference will remain the same in the second scenario. Let us see

EVA=$10,000+(12)($250)−(12)($100) =$10,000+$125−$50 =$10,075

EVB=$10,000+$30 =$10,030

EVC=$10,100+(12)($150)−(12)($200) =$10,100+$75−$100 =$10,075

EVD=$10,100−$70 =$10,030

Thus, it is seen that in the first scenario, P will prefer Gamble A over Gamble B and in the second scenario his preference remains the same, that is, he prefers Gamble C over Gamble D.

Economics Concept Introduction

Introduction:

Expected utility is the satisfaction which will be achieved after consumption of certain goods and services. It is estimated utility.

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Chris Traeger is trying to decide whether or not to purchase health insurance. Chris knows that if he is healthy, his wealth will be $2,000 this year. However, if he gets sick his wealth will only be $500. Chris knows the probability of getting sick is 40%. His utility function is written below. U = (2) What is utility if the individual purchases insurance at the actuarially fair price? 25.29 utils 26.46 utils 31.62 utils 18.97 utils

Suppose a person chooses to play a gamble that is free to play. In this gamble, they have a 10% chance of $100.00, and a 90% chance of nothing. Their utility function is represented in the following equation: U=W 1/2 where W is equal to the amount of "winnings" (or the income). Suppose now Brown Insurance Company offers the person the option of purchasing insurance to insure they will win the $100. What is the minimum amount Brown Insurance would charge you to insure your win? 0.90 O. 99 01 O 10

Answer 2

Question

Chapter 17, Problem 17.9P

a

To determine

Choosing of Gamble A or B

a

Expert Solution

Answer to Problem 17.9P

P will choose Gamble B.

Explanation of Solution

Given Information:

Reference point = $10000

Gain = 1 util per dollar

Loss = 2 util per dollar

Given the initial reference point of $10,000 and utility function of P, P will choose that gamble which gives him the highest expected utility (EU).

EUA=10,000+(12)(250)−(12)(2)(100) =10,000+125−(12)(200) =10,000+125−100 =10,025 utilsEUB=10,000+30 =10,030 utils

Since EUB=10,030utils>EUA=10,025utils , therefore P will choose Gamble B.

Economics Concept Introduction

Introduction:

Expected utility is the satisfaction which will be achieved after consumption of certain goods and services. It is estimated utility.

b)

To determine

Chosing between Gamble C or D.

b)

Expert Solution

Answer to Problem 17.9P

P will choose Gamble C.

Explanation of Solution

Given Information:

Starting bonus = $100

Offer given by gamble Con winning is $150 and on losing is $200

Gamble D loss = $70

If $100 bonus is included along with the initial worth of $10,000, then the initial reference point for P will be $10,000.Given the utility function of P, P will choose that gamble which gives him the highest expected utility (EU).

EUC=10,100+(12)(150)−(12)(2)(200) =10,100+75−(12)(400) =10,100+75−200 =9,975 utilsEUD=10,100−(2)(70) =10,100−140 =9,960 utils

Since, EUC=9,975 utils>EUD=9,960 utils therefore P will choose Gamble C.

If $100 bonus is considered as a winning amount which P will get from the gambles, then his initial reference point becomes $10,000. In this case

Since EUC=9,925 utils>EUD=9,860 utils , therefore P choice will remain the same and will choose Gamble C.

Economics Concept Introduction

Introduction:

Expected utility is the satisfaction which will be achieved after consumption of certain goods and services. It is estimated utility.

c)

To determine

Whether choice made by P are same for choosing gamble.

c)

Expert Solution

Answer to Problem 17.9P

P will prefer Gamble A over Gamble B and in the second scenario his preference remains the same, that is, he prefers Gamble C over Gamble D.

Explanation of Solution

Given Information:

Reference point = $10000

Gain = 1 util per dollar

Loss = 2 util per dollar

No, P choice would not be the same in the first scenario if he would have based his choice on final wealth level (EV) which he will get from gamble. However, his preference will remain the same in the second scenario. Let us see

EVA=$10,000+(12)($250)−(12)($100) =$10,000+$125−$50 =$10,075

EVB=$10,000+$30 =$10,030

EVC=$10,100+(12)($150)−(12)($200) =$10,100+$75−$100 =$10,075

EVD=$10,100−$70 =$10,030

Thus, it is seen that in the first scenario, P will prefer Gamble A over Gamble B and in the second scenario his preference remains the same, that is, he prefers Gamble C over Gamble D.

Economics Concept Introduction

Introduction:

Expected utility is the satisfaction which will be achieved after consumption of certain goods and services. It is estimated utility.

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Answer 3

Question

Chapter 17, Problem 17.9P

a

To determine

Choosing of Gamble A or B

a

Expert Solution

Answer to Problem 17.9P

P will choose Gamble B.

Explanation of Solution

Given Information:

Reference point = $10000

Gain = 1 util per dollar

Loss = 2 util per dollar

Given the initial reference point of $10,000 and utility function of P, P will choose that gamble which gives him the highest expected utility (EU).

EUA=10,000+(12)(250)−(12)(2)(100) =10,000+125−(12)(200) =10,000+125−100 =10,025 utilsEUB=10,000+30 =10,030 utils

Since EUB=10,030utils>EUA=10,025utils , therefore P will choose Gamble B.

Economics Concept Introduction

Introduction:

Expected utility is the satisfaction which will be achieved after consumption of certain goods and services. It is estimated utility.

b)

To determine

Chosing between Gamble C or D.

b)

Expert Solution

Answer to Problem 17.9P

P will choose Gamble C.

Explanation of Solution

Given Information:

Starting bonus = $100

Offer given by gamble Con winning is $150 and on losing is $200

Gamble D loss = $70

If $100 bonus is included along with the initial worth of $10,000, then the initial reference point for P will be $10,000.Given the utility function of P, P will choose that gamble which gives him the highest expected utility (EU).

EUC=10,100+(12)(150)−(12)(2)(200) =10,100+75−(12)(400) =10,100+75−200 =9,975 utilsEUD=10,100−(2)(70) =10,100−140 =9,960 utils

Since, EUC=9,975 utils>EUD=9,960 utils therefore P will choose Gamble C.

If $100 bonus is considered as a winning amount which P will get from the gambles, then his initial reference point becomes $10,000. In this case

Since EUC=9,925 utils>EUD=9,860 utils , therefore P choice will remain the same and will choose Gamble C.

Economics Concept Introduction

Introduction:

Expected utility is the satisfaction which will be achieved after consumption of certain goods and services. It is estimated utility.

c)

To determine

Whether choice made by P are same for choosing gamble.

c)

Expert Solution

Answer to Problem 17.9P

P will prefer Gamble A over Gamble B and in the second scenario his preference remains the same, that is, he prefers Gamble C over Gamble D.

Explanation of Solution

Given Information:

Reference point = $10000

Gain = 1 util per dollar

Loss = 2 util per dollar

No, P choice would not be the same in the first scenario if he would have based his choice on final wealth level (EV) which he will get from gamble. However, his preference will remain the same in the second scenario. Let us see

EVA=$10,000+(12)($250)−(12)($100) =$10,000+$125−$50 =$10,075

EVB=$10,000+$30 =$10,030

EVC=$10,100+(12)($150)−(12)($200) =$10,100+$75−$100 =$10,075

EVD=$10,100−$70 =$10,030

Thus, it is seen that in the first scenario, P will prefer Gamble A over Gamble B and in the second scenario his preference remains the same, that is, he prefers Gamble C over Gamble D.

Economics Concept Introduction

Introduction:

Expected utility is the satisfaction which will be achieved after consumption of certain goods and services. It is estimated utility.

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Answer 4

Question

Chapter 17, Problem 17.9P

a

To determine

Choosing of Gamble A or B

a

Expert Solution

Answer to Problem 17.9P

P will choose Gamble B.

Explanation of Solution

Given Information:

Reference point = $10000

Gain = 1 util per dollar

Loss = 2 util per dollar

Given the initial reference point of $10,000 and utility function of P, P will choose that gamble which gives him the highest expected utility (EU).

EUA=10,000+(12)(250)−(12)(2)(100) =10,000+125−(12)(200) =10,000+125−100 =10,025 utilsEUB=10,000+30 =10,030 utils

Since EUB=10,030utils>EUA=10,025utils , therefore P will choose Gamble B.

Economics Concept Introduction

Introduction:

Expected utility is the satisfaction which will be achieved after consumption of certain goods and services. It is estimated utility.

b)

To determine

Chosing between Gamble C or D.

b)

Expert Solution

Answer to Problem 17.9P

P will choose Gamble C.

Explanation of Solution

Given Information:

Starting bonus = $100

Offer given by gamble Con winning is $150 and on losing is $200

Gamble D loss = $70

If $100 bonus is included along with the initial worth of $10,000, then the initial reference point for P will be $10,000.Given the utility function of P, P will choose that gamble which gives him the highest expected utility (EU).

EUC=10,100+(12)(150)−(12)(2)(200) =10,100+75−(12)(400) =10,100+75−200 =9,975 utilsEUD=10,100−(2)(70) =10,100−140 =9,960 utils

Since, EUC=9,975 utils>EUD=9,960 utils therefore P will choose Gamble C.

If $100 bonus is considered as a winning amount which P will get from the gambles, then his initial reference point becomes $10,000. In this case

Since EUC=9,925 utils>EUD=9,860 utils , therefore P choice will remain the same and will choose Gamble C.

Economics Concept Introduction

Introduction:

Expected utility is the satisfaction which will be achieved after consumption of certain goods and services. It is estimated utility.

c)

To determine

Whether choice made by P are same for choosing gamble.

c)

Expert Solution

Answer to Problem 17.9P

P will prefer Gamble A over Gamble B and in the second scenario his preference remains the same, that is, he prefers Gamble C over Gamble D.

Explanation of Solution

Given Information:

Reference point = $10000

Gain = 1 util per dollar

Loss = 2 util per dollar

No, P choice would not be the same in the first scenario if he would have based his choice on final wealth level (EV) which he will get from gamble. However, his preference will remain the same in the second scenario. Let us see

EVA=$10,000+(12)($250)−(12)($100) =$10,000+$125−$50 =$10,075

EVB=$10,000+$30 =$10,030

EVC=$10,100+(12)($150)−(12)($200) =$10,100+$75−$100 =$10,075

EVD=$10,100−$70 =$10,030

Thus, it is seen that in the first scenario, P will prefer Gamble A over Gamble B and in the second scenario his preference remains the same, that is, he prefers Gamble C over Gamble D.

Economics Concept Introduction

Introduction:

Expected utility is the satisfaction which will be achieved after consumption of certain goods and services. It is estimated utility.

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Answer 5

Chapter 17, Problem 17.9P

a

To determine

Choosing of Gamble A or B

a

Expert Solution

Answer to Problem 17.9P

P will choose Gamble B.

Explanation of Solution

Given Information:

Reference point = $10000

Gain = 1 util per dollar

Loss = 2 util per dollar

Given the initial reference point of $10,000 and utility function of P, P will choose that gamble which gives him the highest expected utility (EU).

EUA=10,000+(12)(250)−(12)(2)(100) =10,000+125−(12)(200) =10,000+125−100 =10,025 utilsEUB=10,000+30 =10,030 utils

Since EUB=10,030utils>EUA=10,025utils , therefore P will choose Gamble B.

Economics Concept Introduction

Introduction:

Expected utility is the satisfaction which will be achieved after consumption of certain goods and services. It is estimated utility.

b)

To determine

Chosing between Gamble C or D.

b)

Expert Solution

Answer to Problem 17.9P

P will choose Gamble C.

Explanation of Solution

Given Information:

Starting bonus = $100

Offer given by gamble Con winning is $150 and on losing is $200

Gamble D loss = $70

If $100 bonus is included along with the initial worth of $10,000, then the initial reference point for P will be $10,000.Given the utility function of P, P will choose that gamble which gives him the highest expected utility (EU).

EUC=10,100+(12)(150)−(12)(2)(200) =10,100+75−(12)(400) =10,100+75−200 =9,975 utilsEUD=10,100−(2)(70) =10,100−140 =9,960 utils

Since, EUC=9,975 utils>EUD=9,960 utils therefore P will choose Gamble C.

If $100 bonus is considered as a winning amount which P will get from the gambles, then his initial reference point becomes $10,000. In this case

Since EUC=9,925 utils>EUD=9,860 utils , therefore P choice will remain the same and will choose Gamble C.

Economics Concept Introduction

Introduction:

Expected utility is the satisfaction which will be achieved after consumption of certain goods and services. It is estimated utility.

c)

To determine

Whether choice made by P are same for choosing gamble.

c)

Expert Solution

Answer to Problem 17.9P

P will prefer Gamble A over Gamble B and in the second scenario his preference remains the same, that is, he prefers Gamble C over Gamble D.

Explanation of Solution

Given Information:

Reference point = $10000

Gain = 1 util per dollar

Loss = 2 util per dollar

No, P choice would not be the same in the first scenario if he would have based his choice on final wealth level (EV) which he will get from gamble. However, his preference will remain the same in the second scenario. Let us see

EVA=$10,000+(12)($250)−(12)($100) =$10,000+$125−$50 =$10,075

EVB=$10,000+$30 =$10,030

EVC=$10,100+(12)($150)−(12)($200) =$10,100+$75−$100 =$10,075

EVD=$10,100−$70 =$10,030

Thus, it is seen that in the first scenario, P will prefer Gamble A over Gamble B and in the second scenario his preference remains the same, that is, he prefers Gamble C over Gamble D.

Economics Concept Introduction

Introduction:

Expected utility is the satisfaction which will be achieved after consumption of certain goods and services. It is estimated utility.

Answer 6

Chapter 17, Problem 17.9P

a

To determine

Choosing of Gamble A or B

a

Expert Solution

Answer to Problem 17.9P

P will choose Gamble B.

Explanation of Solution

Given Information:

Reference point = $10000

Gain = 1 util per dollar

Loss = 2 util per dollar

Given the initial reference point of $10,000 and utility function of P, P will choose that gamble which gives him the highest expected utility (EU).

EUA=10,000+(12)(250)−(12)(2)(100) =10,000+125−(12)(200) =10,000+125−100 =10,025 utilsEUB=10,000+30 =10,030 utils

Since EUB=10,030utils>EUA=10,025utils , therefore P will choose Gamble B.

Economics Concept Introduction

Introduction:

Expected utility is the satisfaction which will be achieved after consumption of certain goods and services. It is estimated utility.

Answer 7

Chapter 17, Problem 17.9P

a

To determine

Choosing of Gamble A or B

Answer 8

a

Expert Solution

Answer to Problem 17.9P

P will choose Gamble B.

Answer 9

a

Expert Solution

Answer 10

a

Expert Solution

Answer 11

Expert Solution

Answer 12

Explanation of Solution

Given Information:

Reference point = $10000

Gain = 1 util per dollar

Loss = 2 util per dollar

Given the initial reference point of $10,000 and utility function of P, P will choose that gamble which gives him the highest expected utility (EU).

EUA=10,000+(12)(250)−(12)(2)(100) =10,000+125−(12)(200) =10,000+125−100 =10,025 utilsEUB=10,000+30 =10,030 utils

Since EUB=10,030utils>EUA=10,025utils , therefore P will choose Gamble B.

Answer 13

Economics Concept Introduction

Introduction:

Expected utility is the satisfaction which will be achieved after consumption of certain goods and services. It is estimated utility.

Answer 14

b)

To determine

Chosing between Gamble C or D.

b)

Expert Solution

Answer to Problem 17.9P

P will choose Gamble C.

Explanation of Solution

Given Information:

Starting bonus = $100

Offer given by gamble Con winning is $150 and on losing is $200

Gamble D loss = $70

If $100 bonus is included along with the initial worth of $10,000, then the initial reference point for P will be $10,000.Given the utility function of P, P will choose that gamble which gives him the highest expected utility (EU).

EUC=10,100+(12)(150)−(12)(2)(200) =10,100+75−(12)(400) =10,100+75−200 =9,975 utilsEUD=10,100−(2)(70) =10,100−140 =9,960 utils

Since, EUC=9,975 utils>EUD=9,960 utils therefore P will choose Gamble C.

If $100 bonus is considered as a winning amount which P will get from the gambles, then his initial reference point becomes $10,000. In this case

Since EUC=9,925 utils>EUD=9,860 utils , therefore P choice will remain the same and will choose Gamble C.

Economics Concept Introduction

Introduction:

Expected utility is the satisfaction which will be achieved after consumption of certain goods and services. It is estimated utility.

Answer 15

b)

To determine

Chosing between Gamble C or D.

Answer 16

b)

Expert Solution

Answer to Problem 17.9P

P will choose Gamble C.

Answer 17

b)

Expert Solution

Answer 18

b)

Expert Solution

Answer 19

Expert Solution

Answer 20

Explanation of Solution

Given Information:

Starting bonus = $100

Offer given by gamble Con winning is $150 and on losing is $200

Gamble D loss = $70

If $100 bonus is included along with the initial worth of $10,000, then the initial reference point for P will be $10,000.Given the utility function of P, P will choose that gamble which gives him the highest expected utility (EU).

EUC=10,100+(12)(150)−(12)(2)(200) =10,100+75−(12)(400) =10,100+75−200 =9,975 utilsEUD=10,100−(2)(70) =10,100−140 =9,960 utils

Since, EUC=9,975 utils>EUD=9,960 utils therefore P will choose Gamble C.

If $100 bonus is considered as a winning amount which P will get from the gambles, then his initial reference point becomes $10,000. In this case

Since EUC=9,925 utils>EUD=9,860 utils , therefore P choice will remain the same and will choose Gamble C.

Answer 21

Economics Concept Introduction

Introduction:

Expected utility is the satisfaction which will be achieved after consumption of certain goods and services. It is estimated utility.

Answer 22

c)

To determine

Whether choice made by P are same for choosing gamble.

c)

Expert Solution

Answer to Problem 17.9P

P will prefer Gamble A over Gamble B and in the second scenario his preference remains the same, that is, he prefers Gamble C over Gamble D.

Explanation of Solution

Given Information:

Reference point = $10000

Gain = 1 util per dollar

Loss = 2 util per dollar

No, P choice would not be the same in the first scenario if he would have based his choice on final wealth level (EV) which he will get from gamble. However, his preference will remain the same in the second scenario. Let us see

EVA=$10,000+(12)($250)−(12)($100) =$10,000+$125−$50 =$10,075

EVB=$10,000+$30 =$10,030

EVC=$10,100+(12)($150)−(12)($200) =$10,100+$75−$100 =$10,075

EVD=$10,100−$70 =$10,030

Thus, it is seen that in the first scenario, P will prefer Gamble A over Gamble B and in the second scenario his preference remains the same, that is, he prefers Gamble C over Gamble D.

Economics Concept Introduction

Introduction:

Expected utility is the satisfaction which will be achieved after consumption of certain goods and services. It is estimated utility.

Answer 23

c)

To determine

Whether choice made by P are same for choosing gamble.

Answer 24

c)

Expert Solution

Answer to Problem 17.9P

P will prefer Gamble A over Gamble B and in the second scenario his preference remains the same, that is, he prefers Gamble C over Gamble D.

Answer 25

c)

Expert Solution

Answer 26

c)

Expert Solution

Answer 27

Expert Solution

Answer 28

Explanation of Solution

Given Information:

Reference point = $10000

Gain = 1 util per dollar

Loss = 2 util per dollar

No, P choice would not be the same in the first scenario if he would have based his choice on final wealth level (EV) which he will get from gamble. However, his preference will remain the same in the second scenario. Let us see

EVA=$10,000+(12)($250)−(12)($100) =$10,000+$125−$50 =$10,075

EVB=$10,000+$30 =$10,030

EVC=$10,100+(12)($150)−(12)($200) =$10,100+$75−$100 =$10,075

EVD=$10,100−$70 =$10,030

Thus, it is seen that in the first scenario, P will prefer Gamble A over Gamble B and in the second scenario his preference remains the same, that is, he prefers Gamble C over Gamble D.

Answer 29

Economics Concept Introduction

Introduction:

Expected utility is the satisfaction which will be achieved after consumption of certain goods and services. It is estimated utility.

Answer 30

Ch. 17.3 - Prob. 1MQ Ch. 17.3 - Prob. 2MQ Ch. 17.3 - Prob. 1.1MQ Ch. 17.3 - Prob. 1.2MQ Ch. 17.3 - Prob. 2.2MQ Ch. 17.3 - Prob. 1.3MQ Ch. 17.3 - Prob. 1TTA Ch. 17.3 - Prob. 2TTA Ch. 17.4 - Prob. 1TTA Ch. 17.4 - Prob. 2TTA

Choosing of Gamble A or B

Choosing of Gamble A or B

Answer to Problem 17.9P

Explanation of Solution

Chosing between Gamble C or D.

Answer to Problem 17.9P

Explanation of Solution

Whether choice made by P are same for choosing gamble.

Answer to Problem 17.9P

Explanation of Solution

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Chapter 17 Solutions