Question 5: Consider the following choice (where pe 0,1), (0,1), and p+q<1): x=($40.p: $10,4; $0,1-p-9) vs....

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Question 5: Consider the following choice (where pe 0,1), (0,1), and p+q<1): x=($40.p: $10,4; $0,1-p-9) vs. y= (a) For what v

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Answer 1

Answer #1

As 5 possible outcomes,

W = 0,10,20,30,40

Then Expected Utility from each outcome

EU(0)= 0

EU(10)= 1/4

EU(20)= 1/2

EU(30)= 3/4

EU(40)= 1

So Expected Utility from lottery X

EU(X) = p +q/4

EU(Y) = (3/4)*(1/2)+(1/2)*(1/6)

= 3/8 + 1/12

= 11/24

A) x dominate over y, if

EU(X) > EU(Y)

p+q/4 > 11/24

& p+q= 1, p = 1-q

1-q+.25q > 11/24

1-11/24 > .75q

13/24 > .75q

q< .722

p> .278

b) y will dominate x , if

EU(Y) > EU(X)

p+q/4 < 11/24

q> .722

.722< q < 1

p < .278

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Answer 2

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