Question: Consider two problems: Problem 1: Prospect A: $2,500 with probability .33, $2,400 with probability .66, Zero with probability .01. Prospect B: $2,400 with certainty. Problem

Consider two problems:

Problem 1:

Prospect A: $2,500 with probability .33, $2,400 with probability .66, Zero with probability .01.

Prospect B: $2,400 with certainty.

Problem 2:

Prospect C: $2,500 with probability .33, Zero with probability .67.

Prospect D: $2,400 with probability .34, Zero with probability .66.

Required:

  1. Calculate the logarithmic utility and expected utility for both Problem 1 and Problem 2
  2. Which one would you choose between Prospect A and Prospect B and Why?
  3. Which one would you choose between Prospect C and Prospect D and Why?

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