Pretending for real that you are given two choices: (1) a gamble with a bowl of 100 red and white balls such that if a randomly selected ball from the bowl is red, then you win $1 million (Outcome A); otherwise, you get nothing (Outcome C); (2) a large amount amount of money between $0 and $1 million for sure (Outcome B).

Assume that you are happier with more money than less money, and artificially assign your utility or degree of happiness of getting Outcome A, $1 million, to be 100; and Outcome C, $0, to be 0. If the bowl contains all 100 red balls, clearly you will chose the gamble. On the other hand, if the bowl contains all 100 white balls, you will definitely choose B because you will get more money than nothing and thus happier.

Now, if the fraction of red balls in the bowl gradually decreases from 100 towards 0, you will feel that Outcome B becomes more and more attractive. Let p* be the fraction for which if the actual fraction of red balls in the bowl, p > p*, you will still prefer the gamble, but if p

5a. (10 points) If the sure money is $500,000, what will be your p* and U($500,000) and is the utility more or than 50?

5b. (10 points) If the sure money is $200,000, what will be your p* and U($200,000) and is the utility more or less than 20?

Answer rating: 100% (QA)

Utility Degree of happiness Outcome A 1 mi UA 100 Utility Degree of happiness O... View the full answer