4) Consider gambles a and b a. pays 100 with probability .25 and -10 with probab

Question

4) Consider gambles a and b a. pays 100 with probability .25 and -10 with probability .75 b. pays 20o with probability .75 and -10o with probability .25 c. calculate expected value of gamble a be sure to show your work EV d. calculate the expected value of gamble b, be sure to show your work EV 1/3 Consider the utility function u M e. the expected utility of gamble a be sure to show your work calculate EU f. calculate the expected value of gamble b, be sure to show your work EV given VNM utility which does the consumer choose g, b Neither

Explanation / Answer

a) For gamble a EVa = win* probability of win + loss*probability of loss = 100*0.25 + -10*0.75 = 25-7.5 = 17.5

b) For gamble b EVb = win* probability of win + loss*probability of loss = 200*0.75 + -100*0.25 = 150-25 = 125

c) For gamble a EUa = utility of win* probability of win + utility of loss*probability of loss = (200)^1/3 * 0.75 + -*100)^1/3 * 0.25 = 4.38-1.16 = 3.22

d) For gamble b EVb = win* probability of win + loss*probability of loss = 200*0.75 + -100*0.25 = 150-25 = 125

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