Consider the following decision makers (with w, indicating the wealth state and U indicating the utility...

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Consider the following decision makers (with w, indicating the wealth state and U indicating the utility function over wealth): Ben: Wo $50; U(w) = 4/w = Will: Wo $50; U(w) - w Liz: wo= $50; U(w)=5 (Note: You may need to download this file to see these functions) 3.1. Imagine that Ben, Will and Liz are presented with a choice between the following gambles represented in the format x= [(x P); (x12, P2)]: Gamble 1: x = (30, 0.05; 1, 0.95) Gamble 2: x = (a, 1) Calculate the Expected Utility (EU) of Gamble 1 for each person, given the information above (round up to the second decimal). [6 pts] Ben Will Liz 3.2. Next, each person is asked to report the lowest Dollar ($) amount they are willing to pay for a sure option over the gamble seen in Q3.1. This is the value of a such that gamble 2 is preferred over gamble 1 for each decision maker. Calculate this value. Show calculations. [6 pts] Ben Will Liz W 3.2. Next, each person is asked to report the lowest Dollar ($) amount they are willing to pay for a sure option over the gamble seen in Q3.1. This is the value of a such that gamble 2 is preferred over gamble 1 for each decision maker. Calculate this value. Show your calculations. [6 pts] Ben Will Liz 3.4. Based on your calculations in Q3.2., who would need the highest certain amount (i.e., a) in order to choose this option over playing the gamble in x? How does this relate to the decision makers' risk preferences (i.e., risk seeking, risk neutral, or risk averse)? [4 pts] 3 3 Consider the following decision makers (with w, indicating the wealth state and U indicating the utility function over wealth): Ben: Wo $50; U(w) = 4/w = Will: Wo $50; U(w) - w Liz: wo= $50; U(w)=5 (Note: You may need to download this file to see these functions) 3.1. Imagine that Ben, Will and Liz are presented with a choice between the following gambles represented in the format x= [(x P); (x12, P2)]: Gamble 1: x = (30, 0.05; 1, 0.95) Gamble 2: x = (a, 1) Calculate the Expected Utility (EU) of Gamble 1 for each person, given the information above (round up to the second decimal). [6 pts] Ben Will Liz 3.2. Next, each person is asked to report the lowest Dollar ($) amount they are willing to pay for a sure option over the gamble seen in Q3.1. This is the value of a such that gamble 2 is preferred over gamble 1 for each decision maker. Calculate this value. Show calculations. [6 pts] Ben Will Liz W 3.2. Next, each person is asked to report the lowest Dollar ($) amount they are willing to pay for a sure option over the gamble seen in Q3.1. This is the value of a such that gamble 2 is preferred over gamble 1 for each decision maker. Calculate this value. Show your calculations. [6 pts] Ben Will Liz 3.4. Based on your calculations in Q3.2., who would need the highest certain amount (i.e., a) in order to choose this option over playing the gamble in x? How does this relate to the decision makers' risk preferences (i.e., risk seeking, risk neutral, or risk averse)? [4 pts] 3 3

Answer rating: 100% (QA)

To answer the questions lets calculate the expected utility EU for Gamble 1 for each person and then ... View the full answer