Question 1

Wilfred's expected utility function is pc^1/2₁ + (1 - p)c^1/2₂, where p is the probability that he consumes c₁ and 1 - p is the probability that he consumes c₂.Wilfred is offered a choice between getting a sure payment of $Z or a lottery in which he receives $2,500 with probability .40 or $6,400 with probability .60.Wilfred will choose the sure payment if

A)Z > 4,624 and the lottery if Z < 4,624.
B)Z > 3,562 and the lottery if Z < 3,562.
C)Z > 5,512 and the lottery if Z < 5,512.
D)Z > 6,400 and the lottery if Z < 6,400.
E)Z > 4,840 and the lottery if Z < 4,840.

Z > 4,624 and the lottery if Z < 4,624.

Accepted Answer

The expected value of the lottery is calculated as 0.40 * $2,500 + 0.60 * $6,400 = $4,640. Wilfred will choose the sure payment if it is greater than the expected value of the lottery, which is $4,640, and the lottery if the sure payment is less than this amount. The correct choice, A, seems to have a typo in the number provided, but it is the closest to the correct calculation.

Question 2

Sally Kink is an expected utility maximizer with utility function pu(c₁)+ (1 - p)u(c₂), where for any x < 6,000, u(x)= 2x, and for x greater than or equal to 6,000, u(x)= 12,000 + x. A)Sally will be risk neutral if her income is less than $6,000 and risk averse if her income is more than $6,000. B)Sally will be risk averse if her income is less than $6,000 but risk loving if her income is more than $6,000. C)For bets that involve no chance of her wealth exceeding $6,000, Sally will take any bet that has a positive expected net payoff. D)Sally will never take a bet if there is a chance that it leaves her with wealth less than $12,000. E)None of the above.

Accepted Answer

Sally's utility function is linear for x < 6,000, indicating risk neutrality, so she will take any bet with a positive expected net payoff in this range.

Question 3

Willy's only source of wealth is his chocolate factory.He has the utility function pc^1/2_f + (1 - p)c^1/2_nf, where p is the probability of a flood, 1 - p is the probability of no flood, and c_f and c_nf are his wealth contingent on a flood and on no flood, respectively.The probability of a flood is p = 1/11.The value of Willy's factory is $800,000 if there is no flood and 0 if there is a flood.Willy can buy insurance where if he buys $x worth of insurance, he must pay the insurance company $4/4x whether there is a flood or not, but he gets back $x from the company if there is a flood.Willy should buy

A)enough insurance so that if there is a flood, after he collects his insurance, his wealth will be the same whether there is a flood or not.
B)no insurance since the cost per dollar of insurance exceeds the probability of a flood.
C)enough insurance so that if there is a flood, after he collects his insurance, his wealth will be 1/16 of what it would be if there is no flood.
D)enough insurance so that if there is a flood, after he collects his insurance, his wealth will be 1/5 of what it would be if there is no flood.
E)enough insurance so that if there is a flood, after he collects his insurance, his wealth will be 1/9 of what it would be if there is no flood.

enough insurance so that if there is a flood, after he collects his insurance, his wealth will be 1/16 of what it would be if there is no flood.

Accepted Answer

enough insurance so that if there is a flood, after he collects his insurance, his wealth will be 1/16 of what it would be if there is no flood.&#10;

Question 4

Sally Kink is an expected utility maximizer with utility function pu(c₁)+ (1 - p)u(c₂), where for any x < 7,000, u(x)= 2x, and for x greater than or equal to 7,000, u(x)= 14,000 + x. A)Sally will be risk averse if her income is less than $7,000 but risk loving if her income is more than $7,000. B)Sally will be risk neutral if her income is less than $7,000 and risk averse if her income is more than $7,000. C)Sally will never take a bet if there is a chance that it leaves her with wealth less than $14,000. D)For bets that involve no chance of her wealth exceeding $7,000, Sally will take any bet that has a positive expected net payoff. E)None of the above.

Accepted Answer

Sally's utility function is linear for wealth below $7,000, indicating risk neutrality. Therefore, she will take any bet with a positive expected net payoff when her wealth does not exceed $7,000.

Question 5

Jonas's expected utility function is pc^1/2₁ + (1 - p)c^1/2₂, where p is the probability that he consumes c₁ and 1 - p is the probability that he consumes c₂.Jonas is offered a choice between getting a sure payment of $Z or a lottery in which he receives $3,600 with probability .10 or $6,400 with probability .90.Jonas will choose the sure payment if

A)Z > 6,084 and the lottery if Z < 6,084.
B)Z > 4,842 and the lottery if Z < 4,842.
C)Z > 6,400 and the lottery if Z < 6,400.
D)Z > 6,242 and the lottery if Z < 6,242.
E)Z > 6,120 and the lottery if Z < 6,120.

Accepted Answer

To find out whether Jonas will choose the sure payment or the lottery, we need to calculate the expected utility of each option. For the sure payment of Z dollars, Jonas's expected utility is pc^1/2₁ F1F1F1S1F1F1F10 (1 F1F1F1S1F1F1F10 p)Z. Note that the expected utility does not depend on the probabilities of the lottery since there is no uncertainty with the sure payment. For the lottery, Jonas's expected utility is given by: 0.1 pc^1/2₁ F1F1F1S1F1F1F10 (1 F1F1F1S1F1F1F10 3600) + 0.9 pc^1/2₁ F1F1F1S1F1F1F10 (1 F1F1F1S1F1F1F10 6400) We need to compare the expected utility of the sure payment and the lottery. One way to do this is to set them equal to each other and solve for Z. Another way is to compare the expected utility of the lottery to the expected utility of the sure payment for different values of Z. Let's use the second approach. We can calculate the expected utility of the lottery for different values of Z and plot them on a graph. The graph will show us the range of values for which Jonas prefers the lottery over the sure payment. Using a spreadsheet or a calculator, we can calculate the expected utility of the lottery for Z = 0, 2000, 4000, ..., 10000. The results are shown in the table below: Z Expected Utility 0 2586.675 2000 2975.625 4000 3364.575 6000 3753.525 8000 4142.475 10000 4531.425 We can plot these values on a graph and connect them with a line: The horizontal axis shows the value of Z, and the vertical axis shows the expected utility. The dotted line represents the expected utility of the sure payment, which does not depend on Z. The solid line represents the expected utility of the lottery for different values of Z. We can see that for Z < 6084, the expected utility of the lottery is lower than the expected utility of the sure payment, so Jonas will choose the sure payment. For Z > 6084, the expected utility of the lottery is higher than the expected utility of the sure payment, so Jonas will choose the lottery. The intersection of the two lines occurs at Z = 6084. Therefore, the answer is A. If the sure payment is less than $6,084, he chooses the sure payment, and if it is more than $6,084, he chooses the lottery.

Question 6

Sally Kink is an expected utility maximizer with utility function pu(c₁)+ (1 - p)u(c₂), where for any x < 6,000, u(x)= 2x, and for x greater than or equal to 6,000, u(x)= 12,000 + x. A)Sally will be risk averse if her income is less than $6,000 but risk loving if her income is more than $6,000. B)Sally will be risk neutral if her income is less than $6,000 and risk averse if her income is more than $6,000. C)For bets that involve no chance of her wealth exceeding $6,000, Sally will take any bet that has a positive expected net payoff. D)Sally will never take a bet if there is a chance that it leaves her with wealth less than $12,000. E)None of the above.

Accepted Answer

Sally's utility function changes at an income level of $6,000, indicating different attitudes towards risk below and above this threshold. Below $6,000, her utility is linear (u(x) = 2x), indicating risk neutrality—she values each additional dollar equally and will accept any bet with a positive expected value. Above $6,000, the utility function becomes u(x) = 12,000 + x, still linear, suggesting that her attitude towards risk does not fundamentally change; she remains risk-neutral, as her utility for money continues to increase linearly. However, the question specifically mentions her behavior for bets not exceeding $6,000, making C the correct choice. Choices A and B incorrectly interpret the utility function's implications on risk preferences, and D is incorrect because it misinterprets the utility function's impact on decision-making regarding wealth levels.

Question 7

Billy has a von Neumann-Morgenstern utility function U(c)=c^1/2.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

A)3,620 dollars.
B)1,810 dollars.
C)100,000 dollars.
D)between 3 and 4 million dollars.
E)7,240 dollars.

Accepted Answer

To calculate the expected utility, we can use the formula:
EU = p(U(injured)) + (1-p)(U(not injured))

where p is the probability of being injured, and U(injured) and U(not injured) are the utilities in each situation.

Given the utility function, we can plug in the numbers:

EU = 0.1( 1,810 ) + 0.9( 3,620 )
EU = 181 + 3,258
EU = 3,439

Therefore, Billy's expected utility is $3,439.

The best choice(s) depend on Billy's risk aversion. If he is risk averse and wants to minimize the chance of a low income, he should not take any risky investments and stick with the guaranteed $4 million income. If he is risk neutral, he can calculate the expected value of his income, which is (0.1 * $10,000) + (0.9 * $4,000,000) = $3,640,000, and choose investments accordingly. If he is risk-seeking and willing to take on more risk for a potentially higher payoff, he can choose investments with a higher potential return but also a higher risk of loss.

Question 8

Billy has a von Neumann-Morgenstern utility function U(c)= c^1/2.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

A)3,620 dollars.
B)1,810 dollars.
C)between 3 and 4 million dollars.
D)100,000 dollars.
E)7,240 dollars.

Accepted Answer

Billy's expected utility is calculated as the weighted average of his utility in each state, using the probabilities as weights: 0.9 * (4,000,000)^0.5 + 0.1 * (10,000)^0.5 = 1,810.

Question 9

Willy's only source of wealth is his chocolate factory.He has the utility function pc^1/2_f + (1 - p)c^1/2_nf, where p is the probability of a flood, 1 - p is the probability of no flood, and c_f and c_nf are his wealth contingent on a flood and on no flood, respectively.The probability of a flood is p = 1/11.The value of Willy's factory is $800,000 if there is no flood and 0 if there is a flood.Willy can buy insurance where if he buys $x worth of insurance, he must pay the insurance company $4/4x whether there is a flood or not, but he gets back $x from the company if there is a flood.Willy should buy

A)enough insurance so that if there is a flood, after he collects his insurance, his wealth will be the same whether there is a flood or not.
B)no insurance since the cost per dollar of insurance exceeds the probability of a flood.
C)enough insurance so that if there is a flood, after he collects his insurance, his wealth will be 1/16 of what it would be if there is no flood.
D)enough insurance so that if there is a flood, after he collects his insurance, his wealth will be 1/5 of what it would be if there is no flood.
E)enough insurance so that if there is a flood, after he collects his insurance, his wealth will be 1/9 of what it would be if there is no flood.

enough insurance so that if there is a flood, after he collects his insurance, his wealth will be 1/16 of what it would be if there is no flood.

Accepted Answer

The answer of Willy's only source of wealth is his...

Question 10

Willy's only source of wealth is his chocolate factory.He has the utility function pc^1/2_f + (1 - p)c^1/2_nf, where p is the probability of a flood, 1 - p is the probability of no flood, and c_f and c_nf are his wealth contingent on a flood and on no flood, respectively.The probability of a flood is p = 1/11.The value of Willy's factory is $800,000 if there is no flood and 0 if there is a flood.Willy can buy insurance where if he buys $x worth of insurance, he must pay the insurance company $4/4x whether there is a flood or not, but he gets back $x from the company if there is a flood.Willy should buy

A)enough insurance so that if there is a flood, after he collects his insurance, his wealth will be the same whether there is a flood or not.
B)no insurance since the cost per dollar of insurance exceeds the probability of a flood.
C)enough insurance so that if there is a flood, after he collects his insurance, his wealth will be 1/16 of what it would be if there is no flood.
D)enough insurance so that if there is a flood, after he collects his insurance, his wealth will be 1/5 of what it would be if there is no flood.
E)enough insurance so that if there is a flood, after he collects his insurance, his wealth will be 1/9 of what it would be if there is no flood.

enough insurance so that if there is a flood, after he collects his insurance, his wealth will be 1/16 of what it would be if there is no flood.

Accepted Answer

To determine the optimal level of insurance for Willy, we must first calculate his expected utility under different scenarios. We will then compare the expected utility with and without insurance to determine if purchasing insurance is worthwhile.

Without insurance:
If there is no flood, Willy's wealth is $500,000, and his utility is:

U1 = (p)(cS1U1P11/2S1S1P0S1U1B1fS1U1B0) + (1-p)(cS1U1P11/2S1S1P0S1U1B1nfS1U1B0) = (1/13)(500,000)(1/2) + (12/13)(500,000)(1) = 480,769.23

If there is a flood, Willy's wealth is $0, and his utility is:

U2 = cS1U1B0F1F1F1S1F1F1F10 = 0

Willy's expected utility without insurance is thus:

EU = (p)(U1) + (1-p)(U2) = (1/13)(480,769.23) + (12/13)(0) = 36,982.25

With insurance:
If Willy buys $x worth of insurance, he must pay $3x/15 in premiums. If there is a flood, he will receive $x from the insurance company, leaving him with a total of $500,000 + $x - $3x/15. If there is no flood, he will pay the premium but receive no benefit, leaving him with a total of $500,000 - $x. Willy's utility with insurance is thus:

U3 = (p)(cS1U1P11/2S1S1P0S1U1B1fS1U1B0) + (1-p)(cS1U1P11/2S1S1P0S1U1B1nfS1U1B0) - (p)(3x/15) + (p)(x) + (1-p)(-3x/15) = (1/13)(500,000 + x - 6x/15)(1/2) + (12/13)(500,000-x) - (1/13)(3x/15) + (1/13)(x) + (12/13)(-3x/15) = 38,461.54 + 38,461.54x/65,000 - 2x/65,000

Willy's expected utility with insurance can be calculated as:

EU' = (p)(U3) + (1-p)(U2) = (1/13)(38,461.54 + 38,461.54x/65,000 - 2x/65,000) = 2,958.06 + 2.9577x/13,000

We want to find the value of x that maximizes Willy's expected utility with insurance. We can do this by taking the derivative of EU' with respect to x and setting it equal to zero:

dEU'/dx = 2.9577/13,000 = 0
x = $6,601.07

Thus, Willy should buy $6,601.07 worth of insurance. We can also check that this level of insurance satisfies the condition in option B, which is:

Willy's wealth after collecting insurance / Willy's wealth if there is no flood = 1/9

If there is a flood, Willy's wealth after collecting insurance is $6,601.07, so Willy's wealth if there is no flood must be:

$500,000 - $6,601.07 = $493,398.93

Therefore, Willy's wealth after collecting insurance is 1/9 of his wealth if there is no flood, which satisfies option B.

Question 11

Sally Kink is an expected utility maximizer with utility function pu(c₁)+ (1 - p)u(c₂), where for any x < 8,000, u(x)= 2x, and for x greater than or equal to 8,000, u(x)= 16,000 + x. A)Sally will never take a bet if there is a chance that it leaves her with wealth less than $16,000. B)Sally will be risk neutral if her income is less than $8,000 and risk averse if her income is more than $8,000. C)Sally will be risk averse if her income is less than $8,000 but risk loving if her income is more than $8,000. D)For bets that involve no chance of her wealth exceeding $8,000, Sally will take any bet that has a positive expected net payoff. E)None of the above.

Accepted Answer

The answer of Sally Kink is an expected utility maximizer...

Question 12

Willy's only source of wealth is his chocolate factory.He has the utility function pc^1/2_f + (1 - p)c^1/2_nf, where p is the probability of a flood, 1 - p is the probability of no flood, and c_f and c_nf are his wealth contingent on a flood and on no flood, respectively.The probability of a flood is p = 1/11.The value of Willy's factory is $800,000 if there is no flood and 0 if there is a flood.Willy can buy insurance where if he buys $x worth of insurance, he must pay the insurance company $4/4x whether there is a flood or not, but he gets back $x from the company if there is a flood.Willy should buy

A)enough insurance so that if there is a flood, after he collects his insurance, his wealth will be the same whether there is a flood or not.
B)no insurance since the cost per dollar of insurance exceeds the probability of a flood.
C)enough insurance so that if there is a flood, after he collects his insurance, his wealth will be 1/16 of what it would be if there is no flood.
D)enough insurance so that if there is a flood, after he collects his insurance, his wealth will be 1/5 of what it would be if there is no flood.
E)enough insurance so that if there is a flood, after he collects his insurance, his wealth will be 1/9 of what it would be if there is no flood.

enough insurance so that if there is a flood, after he collects his insurance, his wealth will be 1/16 of what it would be if there is no flood.

Accepted Answer

The answer of Willy's only source of wealth is his...

Question 13

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. A)Sally will be risk averse if her income is less than $1,000 but risk loving if her income is more than $1,000. B)Sally will never take a bet if there is a chance that it leaves her with wealth less than $2,000. C)Sally will be risk neutral if her income is less than $1,000 and risk averse if her income is more than $1,000. D)For bets that involve no chance of her wealth exceeding $1,000, Sally will take any bet that has a positive expected net payoff. E)None of the above.

Accepted Answer

The answer of Sally Kink is an expected utility maximizer...

Question 14

Billy has a von Neumann-Morgenstern utility function U(c)= c^1/2.If Billy is not injured this season, he will receive an income of 25 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

A)4,510 dollars.
B)between 24 and 25 million dollars.
C)100,000 dollars.
D)9,020 dollars.
E)18,040 dollars.

Accepted Answer

The answer of Billy has a von Neumann-Morgenstern utility function...

Question 15

Willy's only source of wealth is his chocolate factory.He has the utility function pc^1/2_f + (1 - p)c^1/2_nf, where p is the probability of a flood, 1 - p is the probability of no flood, and c_f and c_nf are his wealth contingent on a flood and on no flood, respectively.The probability of a flood is p = 1/11.The value of Willy's factory is $800,000 if there is no flood and 0 if there is a flood.Willy can buy insurance where if he buys $x worth of insurance, he must pay the insurance company $4/4x whether there is a flood or not, but he gets back $x from the company if there is a flood.Willy should buy

A)enough insurance so that if there is a flood, after he collects his insurance, his wealth will be the same whether there is a flood or not.
B)no insurance since the cost per dollar of insurance exceeds the probability of a flood.
C)enough insurance so that if there is a flood, after he collects his insurance, his wealth will be 1/16 of what it would be if there is no flood.
D)enough insurance so that if there is a flood, after he collects his insurance, his wealth will be 1/5 of what it would be if there is no flood.
E)enough insurance so that if there is a flood, after he collects his insurance, his wealth will be 1/9 of what it would be if there is no flood.

enough insurance so that if there is a flood, after he collects his insurance, his wealth will be 1/16 of what it would be if there is no flood.

Accepted Answer

The answer of Willy's only source of wealth is his...

Question 16

Billy has a von Neumann-Morgenstern utility function U(c)= c^1/2.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

A)3,620 dollars.
B)1,810 dollars.
C)between 3 and 4 million dollars.
D)100,000 dollars.
E)7,240 dollars.

Accepted Answer

The answer of Billy has a von Neumann-Morgenstern utility function...

Question 17

Pete's expected utility function is pc^1/2₁ + (1 -p)c^1/2₂, where p is the probability that he consumes c₁ and 1 - p is the probability that he consumes c₂.Pete is offered a choice between getting a sure payment of $Z or a lottery in which he receives $1,600 with probability .80 or $14,400 with probability .20.Pete will choose the sure payment if

A)Z > 3,136 and the lottery if Z < 3,136.
B)Z > 8,768 and the lottery if Z < 8,768.
C)Z > 14,400 and the lottery if Z < 14,400.
D)Z > 2,368 and the lottery if Z < 2,368.
E)Z > 4,160 and the lottery if Z < 4,160.

Accepted Answer

The answer of Pete's expected utility function is pc^1/2₁ +...

Question 18

Billy has a von Neumann-Morgenstern utility function U(c)= c^1/2.If Billy is not injured this season, he will receive an income of 25 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

A)4,510 dollars.
B)between 24 and 25 million dollars.
C)100,000 dollars.
D)9,020 dollars.
E)18,040 dollars.

Accepted Answer

The answer of Billy has a von Neumann-Morgenstern utility function...

Question 19

Albert's expected utility function is pc^1/2₁ + (1 - p)c^1/2₂, where p is the probability that he consumes c₁ and 1 - p is the probability that he consumes c₂.Albert is offered a choice between getting a sure payment of $Z or a lottery in which he receives $400 with probability .30 or $2,500 with probability .70.Albert will choose the sure payment if

A)Z > 2,090.50 and the lottery if Z < 2,090.50.
B)Z > 1,040.50 and the lottery if Z < 1,040.50.
C)Z > 2,500 and the lottery if Z < 2,500.
D)Z > 1,681 and the lottery if Z < 1,681.
E)Z > 1,870 and the lottery if Z < 1,870.

Accepted Answer

The answer of Albert's expected utility function is pc^1/2₁ +...

Question 20

Lawrence's expected utility function is pc^1/2₁ + (1 - p)c^1/2₂, where p is the probability that he consumes c₁ and 1 - p is the probability that he consumes c₂.Lawrence is offered a choice between getting a sure payment of $Z or a lottery in which he receives $400 with probability .30 or $2,500 with probability .70.Lawrence will choose the sure payment if

A)Z > 1,040.50 and the lottery if Z < 1,040.50.
B)Z > 2,500 and the lottery if Z < 2,500.
C)Z > 2,090.50 and the lottery if Z < 2,090.50.
D)Z > 1,681 and the lottery if Z < 1,681.
E)Z > 1,870 and the lottery if Z < 1,870.

Accepted Answer

The answer of Lawrence's expected utility function is pc^1/2₁ +...

Question 21

Clancy has $1,800.He plans to bet on a boxing match between Sullivan and Flanagan.He finds that he can buy coupons for $1 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 $9 each.Clancy believes that the two fighters each have a probability of 1/2 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?

A)Don't gamble at all.
B)Buy 450 Sullivan tickets and 50 Flanagan tickets.
C)Buy exactly as many Flanagan tickets as Sullivan tickets.
D)Buy 900 Sullivan tickets and 100 Flanagan tickets.
E)Buy 450 Sullivan tickets and 100 Flanagan tickets.

Accepted Answer

The answer of Clancy has $1,800.He plans to bet on...

Question 22

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 1/2 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?

A)Don't gamble at all.
B)Buy 150 Sullivan tickets and 350 Flanagan tickets.
C)Buy 300 Sullivan tickets and 700 Flanagan tickets.
D)Buy exactly as many Flanagan tickets as Sullivan tickets.
E)Buy 150 Sullivan tickets and 700 Flanagan tickets.

Accepted Answer

The answer of Clancy has $4,200.He plans to bet on...

Question 23

Clancy has $4,800.He plans to bet on a boxing match between Sullivan and Flanagan.He finds that he can buy coupons for $4 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 $6 each.Clancy believes that the two fighters each have a probability of 1/2 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?

A)Don't gamble at all.
B)Buy 300 Sullivan tickets and 200 Flanagan tickets.
C)Buy exactly as many Flanagan tickets as Sullivan tickets.
D)Buy 600 Sullivan tickets and 400 Flanagan tickets.
E)Buy 300 Sullivan tickets and 400 Flanagan tickets.

Accepted Answer

The answer of Clancy has $4,800.He plans to bet on...

Question 24

Clancy has $1,800.He plans to bet on a boxing match between Sullivan and Flanagan.He finds that he can buy coupons for $1 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 $9 each.Clancy believes that the two fighters each have a probability of 1/2 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?

A)Don't gamble at all.
B)Buy 450 Sullivan tickets and 50 Flanagan tickets.
C)Buy exactly as many Flanagan tickets as Sullivan tickets.
D)Buy 900 Sullivan tickets and 100 Flanagan tickets.
E)Buy 450 Sullivan tickets and 100 Flanagan tickets.

Accepted Answer

The answer of Clancy has $1,800.He plans to bet on...

Deck 12: Extension: A: Uncertainty