Question

2. Connie's utility depends upon her income according to the table below. Use this information to answer the following questions. 100 200 300 348 400 500 600 700 Utility 10 16 21 23 25 28 30 31 (a) She has received a prize which depends on a fair coin toss. With a probability of 0.5 she will receive 200 and with probability 0.5 she will receive 600. What is the expected value of the prize? What is the expected utility of the prize? prize of 300 or decide to toss the coin (ie accept prize in a). Explain your answer of the coin (in favour of the certain prize)? Explain. (b) Connie is offered an alternate certain prize, she receives €300 with certainty. will she accept the certain (c) What is the minimum value of the certain prize that Connie would need so that she would forego the toss

Answer 1

2)a) expected value of the prize is 0.5*200+ 0.5*600= 400.

Expected Utility of the prize = 0.5*16+ 0.5*30(weighted average of utilities at both the outcomes.)= 23

b)The utility of the certain prize 300 = 21, which is less than the expected utilitu of the prize,so she will not accept the certain prize.

c)The minimum value of the certain prize should be 348 for Connie to forego the toss, as the utility of 348 is also 23.