Exam 17: Choice Making Under Uncertainty

Consider two identical fishermen with utility functions U(x)= x/2, where x is the number of fish caught. Assume that the probability of either fisherman catching a fish is .05 and that it is impossible for either of them to catch more than one fish. If the two fishermen decided to divide whatever catch was taken, the expected utility of each fisherman would be:

Pat's utility function is u(y)= y^1/2 and his income is $100. He is offered a gamble paying $300 with probability 1/2 and $0 with probability 1/2. What is the certainty equivalent of this gamble?

Which one of the sets below is a prospect?

If one's indifference curves in a state space graph are concave to the origin, the individual is:

In choices involving risk, an individual chooses:

The law of large numbers states that insurance companies:

Which of the following represents the utility function of someone that is risk neutral?

If Monica says she is indifferent between the prospect (2 candy bars, shot in the head; .999, .001)and the prospect (1 candy bar; 1 orange juice)then:

A risk- inclined individual is characterized by a utility function that exhibits:

Suppose Diana's utility function is given by: U = 100W^0.9 where W is her wealth in thousands. Her current wealth is $1,000. i)Suppose Diana faces a 0.1 chance of losing $100. Calculate her willingness to pay for an insurance policy that would pay her $100 in the event of such a loss. ii)Diana's utility is greatly augmented by her house. If she were to lose it, it would be reduced to: U = W^0.9. Calculate the loss of wealth that would be equivalent, in terms of its utility impact, to the death of her children.

Stephanie's utility function is given by U = W^1/2 where W is the value of her house. She is considering whether to buy tornado insurance for her house. Her house is currently valued at $105,625. She knows that her house will be destroyed by a tornado with probability .10 this spring. If it is hit, the rubble will be worth $15,625. What is the maximum amount that she is willing to pay for insurance if the insurance company pays $46875 and refunds her insurance premium in case of a tornado?

The expected utility hypothesis requires information about all of the following except:

Subjective probabilities

Suppose you are given the following preference information: a: (0, 1, 0: 3000, 2000, 1000)is indifferent to b: (3/4, 0, 1/4: 3000, 2000, 1000). Given the prospects c: (1/3, 1/3, 1/3: 3000, 2000, 1000)and c: (1/2, 1/4, 1/4: 3000, 2000, 1000), which of the following statements is true?

Consider two identical fishermen with utility functions U(x)= x/2, where x is the number of fish caught. Assume that the probability of either fisherman catching a fish is .05 and that it is impossible for either of them to catch more than one fish. What is one fisherman's expected utility from fishing alone?

Consider the following gamble: on the toss of a fair coin, you receive $10 million if a head appears and nothing if a tail appears. What is Diane Eaton's reservation price for the gamble?

Risk- aversion:

Suppose you are offered the following 2 prospects, a: (0, 1, 0: 3000, 2000, 1000)or b: (1/2, 1/4, 1/4: 3000, 2000, 1000). If your preference ordering is such that a is preferred to b, then:

The continuity assumption holds that consumers substitute:

When dealing with individual behaviour in risky situations which of the following assumptions concerns the way in which individuals choose between prospects having the same two outcomes but different probabilities?