Assignment1

# Assignment1 - ActSc 372 WINTER 2009 Assignment 1 Due Date:...

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ActSc 372 WINTER 2009 Assignment 1 Due Date: Jan 21, 2009 (in class 12:30pm) 1. Suppose you are an expected utility maximizer with utility of wealth u ( w ) = - e - w . What is the maximum amount, to the nearest \$0.01, that you are willing to pay to participate in the coin tossing gamble as described in the St Petersburg Paradox? 2. Suppose you are asked to choose between the following two gambles: 1A: Winning \$1 million with certainty, or 1B: A 90% chance of winning \$1 million, 9% chance of winning \$5 million and 1% chance of winning nothing. You are then asked to choose between gambles 2A and 2B: 2A: A 10% chance of winning \$1 million and a 90% chance of winning nothing, or 2B: A 9% chance of winning \$5 million and a 91% chance of winning nothing. (a) If you are an expected value maximizer, which gamble would you choose between 1A and 1B? What about between 2A and 2B? (b) Presented with the choice between 1A and 1B, most people choose 1A. Presented with the choice between 2A and 2B, most people choose 2B. i. Show that there is no utility function that can explain the choices

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## This note was uploaded on 06/10/2010 for the course ACTSC 372 taught by Professor Maryhardy during the Winter '09 term at Waterloo.

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Assignment1 - ActSc 372 WINTER 2009 Assignment 1 Due Date:...

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