Question: This is an experiment to elicit the risk preferences of an agent. In the experiment the agent is offered a choice between different lotteries.

This is an experiment to elicit the risk preferences of an agent.

This is an experiment to elicit the risk preferences of an agent. In the experiment the agent is offered a choice between different lotteries. Each of the lotteries has two possible pay-offs that are equally likely. The lotteries are given by the following table. All pay-offs are indicated in EUR. Suppose that the agents do have no initial wealth. Choice low pay-off high pay-off Lottery A Lottery B 28 24 u(w) Lottery C Lottery D Lottery E Lottery F Consider that the agent choosing has a VNM utility function (w) given by wl-y for y 0, y = 1 fory=1 1-y In(w) 20 16 12 2 28 36 44 52 60 70 1. Calculate the expected values of each lottery. 2. Which lottery would an agent with y = 0.7 pick? 3. Suppose the agent has a wealth level of 10000 EUR which lottery would the same agent with y 0.7 pick now?

Step by Step Solution

★★★★★

3.34 Rating (145 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

Answer 1 Calculate the expected values of each lottery Lottery A ELottery A 28 28 56 Lottery B ... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Electrical Engineering Questions!

What does a stop order to sell at $2 mean? When might it be used? What does a limit order to sell at $2 mean? When might it be used?

What are the warning signs of identity theft? What steps can you take to avoid it?

What are warning limits, and what purpose do they serve?

There are two groups of equal size, each with a utility function given by U(M) = M, where M = 100 is the initial wealth level for every individual. Each member of group 1 faces a loss of 36 with...

John Aaron called the meeting of the Programs and Arts Committee of the Student Government Association to order. "Okay, okay, everybody, quiet down i have an important announcement to make," he...

Refer to Table 11W.1 and suppose the price of new product C is $2 instead of $4. TABLE 11W.1 Utility Maximization with the Introduction of a New Product (Income = $10)* How does this affect the...

In this advanced problem, lets look at the behavior of ordinary Treasury bonds and inflation-indexed bonds, or TIPS. We will simplify by assuming annual interest payments rather than semiannual....

It has long been a dream of farmers to summon rain when it is needed for their crops. Crop losses to drought have significant economic impact. One possibility is cloud seeding in which chemicals are...

Two randomly selected grocery store patrons are each asked to take a blind taste test and to then state which of three diet colas ( marked as A, B, or C) he or she prefers. a Draw a tree diagram...

Concerned about Friday absenteeism, management examined absenteeism rates for the last three Fridays in four assembly plants. Does this sample provide sufficient evidence to conclude that there is a...

The controller of Dash Shoes Inc. instructs you to prepare a monthly cash budget for the next three months. You are presented with the following budget information: March April May Sales $104,000...

Explain how the communication tone, structure and style may impact on others. Provide an example of each. Question Explain how the communication tone, structure and style may impact on others. (40-80...

1-2: The test data of a pressure sensor is shown in the following table, calculate the nonlinear error, hysteresis and repeatability error. Output value/mV Pressure First cycle Second cycle Third...

Breach of Human Rights? L.B Hospitality Hotel offers customers free toiletries, coffee and snack basket for each night clients stay at their hotel. These items are left in each room by the...

A water storage tank has a cylindrical shape. The diameter of the base of the tank is 0.568 m. The height of the tank is 0.855 m. This is shown in the following diagram. -0.568 m 0.855 m (a) Write...

A company is studying the effectiveness of their text message advertisements by counting the number of visits to their website that originate from a link in one of the texts. The function A(r) gives...

Break-Even Sales Under Present and Proposed Conditions Portmann Company, operating at full capacity, sold 1,000,000 units at a price of $187 per unit during the current year. Its income statement is...

Refer to the table to answer the following questions. Year Nominal GDP (in billions) Total Federal Spending (in billions) Real GDP (in billions) Real Federal Spending (in billions) 2000 9,817 578...

Pasta, a restaurant specializing in fresh pasta, installed a pasta cooker in early 2009 at a cost of $12,400. The cooker had an expected life of five years and a residual value of $900 when...

Holmes Company produces wooden playhouses. When a customer orders a playhouse, it is delivered in pieces with detailed instructions on how to put it together. Some customers prefer that Holmes puts...

The following T-accounts summarize the operations of Chen Construction Company for July 2011. Required: 1. Assuming that only one transaction occurred on each day (beginning on July 2) and that no...

Take a sheet of paper and make three columns. In each column, describe a conflict in which you thought the other person should change, you were able to change the conditions (or social environment)...

Take a sheet of paper and make three columns on it. Label the columns instrumental goal, relationship goal, and identity goal. In each column, describe a conflict you experienced or observed with...

In the following case study, how might you use the ideas in this chapter to produce a creative and more insightful resolution to the conflict? My husband and I went out for an early dinner at a nice...