2. (20) Suppose your VN-M utility is u(w) = ln w. You are offered to bet...

Question

Question

2. (20) Suppose your VN-M utility is u(w) = ln w. You are offered to bet on a coin flip which lands heads with probability p.

business economics

Add a comment Improve this question Transcribed image text

Answer 1

Answer #1

Answer 2

The amount one should bet will be that amount such that Expected Utility gets maximized.

Let the amount he should bet be x.

Thus Expected utility(EU) is given by :

EU = put P₂ U₂ P = probability of head =p U = Utility If head occurs P2 a probability of Tail . Ug = utility It tail occurs =

JEU =0 / weate +6 = ) (-1) 20 worx wota Worx - wo - pA = Wo-pWota-ap => x = Wol2p-1) ? Amount he should bet.

Add a comment

Answer 2

Similar Homework Help Questions

2. (20) Suppose your VN-M utility is u(w) = ln w. You are offered to bet...

2. (20) Suppose your VN-M utility is u(w) = ln w. You are offered to bet on a coin flip which lands heads with probability p. If you bet $x, you win o in case of a head, and lose x in case of a tail. Your initial wealth is w. How much would you bet?
Your current wealth is M=$100 and your utility function is U=M2. You have received a ticket...

Your current wealth is M=$100 and your utility function is U=M2. You have received a ticket that allows you to participate in the following fair gamble: in a coin flip, you will receive $40 if the coin lands on heads and lose $40 if it lands on tails. A. What is the expected value of this gamble? What is the expected utility of this gamble? B. What is the lowest price for which you would sell your ticket?
Suppose you can place a bet in the following game. You flip a fair coin (50-50...

Suppose you can place a bet in the following game. You flip a fair coin (50-50 chance it lands heads). If it lands heads, you get 4 dollars, if it lands tails, you pay 1 dollar. This is the only bet you can make. If you don't make the bet you will neither gain nor lose money. What is the utility for you of the coin landing tails if you make the bet (assume utility is dollars)?

Calwlate Expected utility (ECU (w) and the utility of expected value (CEV) for a) U (w)=51n(w),...

Calwlate Expected utility (ECU (w) and the utility of expected value (CEV) for a) U (w)=51n(w), state the relationship and classity the risk attitude; b) u (w)=562, state the relationship and classify to risk attitude, c) U (w) = 250-w, state the relationship and classity & risk attitude, A gamble bassed on fair coin toss which pays $250 if the coin lands and $20 it the coin lands tail (fair coin toss i e. probabity of heads is 50%= probability...
Suppose you can place a bet in the following game. You flip a fair coin (50-50...

Suppose you can place a bet in the following game. You flip a fair coin (50-50 chance it lands heads). If it lands heads, you get 4 dollars, if it lands tails, you pay 1 dollar. This is the only bet you can make. If you don't make the bet you will neither gain nor lose money. Should you place the bet?
(20 points) Clarice is an expected utility maximizer and her utility function over money is given...

(20 points) Clarice is an expected utility maximizer and her utility function over money is given by u = cả. Clarice's friend, Hannibal, has offered to bet with her $1,000 on the outcome of the toss of a coin. That is, if the coin comes up heads, Clarice must pay Hannibal $1,000 and if the coin comes up tail, Hannibal must pay Clarice $1,000. The coin is a fair coin, so that the probability of heads and the probability of...

5. Understanding risk aversion Suppose your fr end Gilberto offers you the following bet: He will...

risk friendly / risk-averse would / would not greater than / less than 5. Understanding risk aversion Suppose your fr end Gilberto offers you the following bet: He will flip、coin and pay you S3,000 if it lands heads up and collect S3 000 from you if it lands tails up. Currently, your level of wealth is $9,000. The graph shows your uility function from wealth. Use the graph to answer te ollowing questions 83 60 43 2D WEALTH (Thoueards cr...
W 2 Assume you have the following von Neumann-Morgenstern utility function: U(w) = 200 – (12...

W 2 Assume you have the following von Neumann-Morgenstern utility function: U(w) = 200 – (12 – 1000) where w denotes wealth measured in pounds. Your friend believes that it will rain in Reading tomorrow while you think that there is a 75% probability that it will not rain. You are going to take a bet. Your friend will pay you x pounds if it does not rain and you pay your friend x pounds if it rains. Your current...
Suppose you have a six sided die. One face is printed with the number 1. Two faces...

Suppose you have a six sided die. One face is printed with the number 1. Two faces are printed with the number 2. Three faces are printed with the number 3. You also have 3 coins: C_1, C_2, and C_3. C_1 will land Heads with probability 1/5. C_2 will land Heads with probability 1/3. C_3 will land Heads with probability 1/2. You roll the die. If the die lands with a 1 face up, flip coin C_1 If the die lands with...

Suppose you have a six sided die. One face is printed with the number 1. Two...

Suppose you have a six sided die. One face is printed with the number 1. Two faces are printed with the number 2. Three faces are printed with the number 3. You also have 3 coins: C_1, C_2, and C_3. C_1 will land Heads with probability 1/3. C_2 will land Heads with probability 1/5. C_3 will land Heads with probability 1/4. You roll the die. If the die lands with a 1 face up, flip coin C_1 If the die...

2. (20) Suppose your VN-M utility is u(w) = ln w. You are offered to bet...

Homework Answers

Add Answer to:
2. (20) Suppose your VN-M utility is u(w) = ln w. You are offered to bet...

Post as a guest

Earn Coins