EBK INTERMEDIATE MICROECONOMICS AND ITS
EBK INTERMEDIATE MICROECONOMICS AND ITS
12th Edition
ISBN: 9781305176386
Author: Snyder
Publisher: YUZU
Question
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Chapter 17, Problem 17.9P

a

To determine

Choosing of Gamble A or B

a

Expert Solution
Check Mark

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+125100=10,025utilsEUB=10,000+30=10,030utils

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
Check Mark

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+75200=9,975utilsEUD=10,100(2)(70)=10,100140=9,960utils

Since, EUC=9,975utils>EUD=9,960utils 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=9,925utils>EUD=9,860utils , 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
Check Mark

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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