Question: Consider the bet ( $400, 13 ; $ Y , 23 ). (a) Suppose that Heidi is an expected utility maximizer with u ( x

Consider the bet ( $400, 13 ; $Y, 23 ).

(a) Suppose that Heidi is an expected utility maximizer with u(x) = ln x, and her initial wealth is $12000.

(i) For what values of Y does Heidi reject a single play of the bet?

(ii) For what values of Y does Heidi accept two independent plays of the bet? (iii) Is it possible for Heidi to reject the single bet but accept the aggregate bet?

Note: For part (a), report your answers to 3 decimal points.

(b) Suppose that Bruce also has initial wealth $12000, but he evaluates gambles according to prospect theory with (p) = p and

if v(x) = x if x 0

= 2.5x if x 0.

(i) For what values of Y does Bruce reject a single play of the bet?

(ii) For what values of Y does Bruce accept two independent plays of the bet? (iii) Is it possible for Bruce to reject the single bet but accept the aggregate bet?

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