Exam 11: A: Uncertainty

Sally Kink is an expected utility maximizer with utility function pu(c₁) + (1 - p)u(c₂), where for any x < 1,000, u(x) = 2x, and for x greater than or equal to 1,000, u(x) = 2,000 + x.

Clancy has $1,800. He plans to bet on a boxing match between Sullivan and Flanagan. He finds that he can buy coupons for $9 each that will pay off $10 each if Sullivan wins. He also finds in another store some coupons that will pay off $10 if Flanagan wins. The Flanagan tickets cost $1 each. Clancy believes that the two fighters each have a probability of of winning. Clancy is a risk averter who tries to maximize the expected value of the natural log of his wealth. Which of the following strategies would maximize his expected utility?

In Problem 9, Billy has a von Neumann-Morgenstern utility function U(c) . If Billy is not injured this season, he will receive an income of 4 million dollars. If he is injured, his income will be only 10,000 dollars. The probability that he will be injured is .1 and the probability that he will not be injured is .9. His expected utility is

In Problem 9, Billy has a von Neumann-Morgenstern utility function U(c) . If Billy is not injured this season, he will receive an income of 4 million dollars. If he is injured, his income will be only 10,000 dollars. The probability that he will be injured is .1 and the probability that he will not be injured is .9. His expected utility is

Clancy has $4,200. He plans to bet on a boxing match between Sullivan and Flanagan. He finds that he can buy coupons for $7 each that will pay off $10 each if Sullivan wins. He also finds in another store some coupons that will pay off $10 if Flanagan wins. The Flanagan tickets cost $3 each. Clancy believes that the two fighters each have a probability of of winning. Clancy is a risk averter who tries to maximize the expected value of the natural log of his wealth. Which of the following strategies would maximize his expected utility?