Question

5. Expected Utility Suppose there are lotteries: Lotter 1: 50% chance of getting 100 million and 50% chance of getting 500 mi

0 0
Add a comment Improve this question Transcribed image text
Answer #1

The person is risk seeking

Reason: the variability in income is higher in case of lottery 1 than lottery 2 and thus a person preferring lottery 1 must be risk seeking.

Thanks!

Add a comment
Know the answer?
Add Answer to:
5. Expected Utility Suppose there are lotteries: Lotter 1: 50% chance of getting 100 million and...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
  • 2. Consider two lotteries, A and B. With lottery A, there is a 0.90 chance that...

    2. Consider two lotteries, A and B. With lottery A, there is a 0.90 chance that you receive a payoff of S0 and a 0.10 chance that you receive a payoff of $400. With lottery B, there is a 0.50 chance that you receive a payoff of S30 and a 0.50 chance that you receive a payoff of $50, a) Verify that these two lotteries have the same expected value but that lottery A has a bigger variance than lottery...

  • Suppose the utility function of a decision maker for the amount of money x is given...

    Suppose the utility function of a decision maker for the amount of money x is given by U(x) = x2. (a) This decision maker is considering the following two lotteries: A: With probability 1, he gains 3000. B: With probability 0.4, he gains TL 1000, and with probability 0.6, he gains TL 4000. Which of the two lotteries will the decision maker prefer? What is the certainty equivalent (CE) for lottery B? Based on the CE for B, is the...

  • Suppose a risk averse person is given the choice between the following lotteries: L1 = {(-200,...

    Suppose a risk averse person is given the choice between the following lotteries: L1 = {(-200, 0.5), (200,0.5)}; L2 = {(-100, 0.5), (100, 0.5)}; L3 = {(-100, 0.8), (400, 0.2)}, where the first parameter is the payoff and the second the probability. Which lottery will he/she prefer?

  • a. If your are offered a gift card valued $50 or the chance at a raffle...

    a. If your are offered a gift card valued $50 or the chance at a raffle for a giftcard valued $100, with a 50% chance at getting the giftcard or a 50% chance of getting nothing, which would you choose? Given this answer explain whether you are risk averse, risk loving, or risk neutral and why. 30 50 75 100 7) The above figure shows Bob's utility function. He currently has $100 of wealth, but there is a 50% chance...

  • 6. A decision maker has a vNM utility function over money of u(x) = x2. This...

    6. A decision maker has a vNM utility function over money of u(x) = x2. This decision maker is (a) risk-averse. (b) risk-neutral. (c) risk-loving. (d) none of the above. 7. Consider two lotteries: • Lottery 1: The gamble (0.1, 0.6, 0.3) over the final wealth levels ($1, $2, $3). (The expected value of this lottery equals $2.2) • Lottery 2: Get $2.2 for sure. a) Any risk-averse individual will choose the first lottery. b) Any risk-averse individual will choose...

  • Question 2: Lottery basics Consider the following four lotteries. $200,000 0.5 $100,000 L2 L1 -$1,000 0.6...

    Question 2: Lottery basics Consider the following four lotteries. $200,000 0.5 $100,000 L2 L1 -$1,000 0.6 s65,000 0.5 L3 $30.000 0.4 $30,000 Anıswer the following questions (a) Based on your preferences and the utility you perceive, rank the four lotteries. (b) Based on your answer in part (b), calculate 1/2, 14, and ra (c) Using ro, T1/4, 1/2, Ts/a, and Fı, draw a curve that fits your utility. From observation, are you risk-seeking, risk-neutral, or risk-averse? What is your risk...

  • Suppose you are facing two lotteries p and q, where the lotteries are defined over the...

    Suppose you are facing two lotteries p and q, where the lotteries are defined over the set of outcomes X = {$1, $10, $25, $100}. The lotteries are defined as follows: p = (0.1, 0.25, 0.6, 0.05) q = (0.2, 0.4, 0.2, 0.2) (a) Suppose your utility function over outcomes is u(x) = ln(x). Calculate the expected utility of lottery p and of lottery q, then explain which lottery will be preferred. (3 points) (b) Now suppose your utility function...

  • Suppose you face a choice between a certain income of $3,000, or a 50-50 chance of...

    Suppose you face a choice between a certain income of $3,000, or a 50-50 chance of income of $1,500 or $4,500. Suppose you prefer the 50-50 chance of $1,500 or $4,500 1. True or False: You are not risk averse a) True b) False Suppose that a disease affects 4% of the population and that everyone is equally likely to get the disease. Treatment for this disease costs $28,000. Assume that this disease, and necessary treatment, represent the only healthcare...

  • QUESTION 37 The state lottery offers a 1 in one-million chance to win $1 million; if...

    QUESTION 37 The state lottery offers a 1 in one-million chance to win $1 million; if a ticket is $1.50, who would buy a ticket? risk-neutral people risk-averse people risk-loving people no one

  • Suppose, as usual, Elmos utility function over gambles satisfies the expected utility property. Consider two gambles...

    Suppose, as usual, Elmos utility function over gambles satisfies the expected utility property. Consider two gambles g and h such that E[g] > E[h]. (a) Suppose Elmo is risk-averse. Will Elmo necessarily prefer g to h? Explain. (b) What if Elmo is risk-neutral? Explain. (c) What if Elmo is risk-loving? Explain.

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT