Briefly describe framing. What affect would framing have on an expected utility maximizer’s preferences? Briefly explain.
Briefly describe framing. What affect would framing have on an expected utility maximizer’s preferences? Briefly explain.
Homework Answers
The evaluation of probabilities and outcomes for economic decisions are subject to how the problem is framed. Framing leads to irrational choices and violates the elementary requirements of consistency and coherence of the Theory of Rational Choice.
It is a criticism of the Expected Utility Theory as the theory provides a set of axioms with a given criteria for rationality of the choices. That when given a choice, a decision-maker will choose the prospect with the highest expected utility. However,the same choices when framed differently (when in terms of gains eg. 1/3rd chance of 100 out of 300 lives saved, or when in terms of losses eg. 1/3rd chance of 200 out of 300 lives lost) leads to different selection of choices.
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Briefly describe framing. What affect would framing have on an expected utility maximizer’s preferences? Briefly explain.
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1. True or False, and explain briefly. 1) The assumption that more is better implies that the indifference curves are upward sloping 2) Convexity of indifference curves implies that consumers are willing to give up more to get an extra the more they have 3) Consider the following three bundles. Bundle Good Goody If Bundles A and B are on the same indifference curve, preferences satisfy all the usual assumptions introduced in the lecture, Bundle Cis preferred to Bundle A...
2) Describe Larry, Judy and Carol's risk preferences. Their utility as a function of income is...
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2) Describe Larry, Judy and Carol's risk preferences. Their utility as a function of income is given as follows Larry: UL(I) = 101 Judy: UJ(I) = 312 Carol: UC (1)=201.
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