Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 1

Imagine that you are a subject in one of Maurice Allais lab experiments involving the same four gambles as in the chapter. Gamble A provides a 89% chance of winning $1,000, a 10% chance of winning $5,000, and a 1% chance of winning nothing. Gamble B provides a 100% chance of winning $1,000. Gamble C provides an 11% chance of winning $1,000 and an 89% chance of winning nothing. Finally, gamble D provides a 10% chance of winning $5,000 and a 90% chance of winning nothing. Your utility function over money is U(x) = \Jx.
a. Compute your expected utility from each of the four gambles.
b. In the first scenario, you are given a choice between gambles A and B. Which would you choose given your utility function?
c. In the second scenario, you are given a choice between gambles C and D. Which would you choose given your utility function?
d. Compare your choices in the two scenarios, and compare them to the actual experimental results reported in the text.