PS_CH05 - ECON2296-PracticeQuestionsChapter5 Question 1...

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ECON 2296  -  Practice Questions Chapter 5 Question 1 Connie’s utility depends upon her income. Her utility function is U = I 1/2 . She has received a prize that depends on the roll of a pair of dice. If she rolls a 3, 4, 6 or 8, she will receive $400, otherwise she will receive $100. a) What is the expected payoff from this prize? The probability of rolling a 3 is 1/18, the probability of rolling a 4 is 3/36, the probability of rolling a 6 is 5/36, and the probability of rolling an 8 is 5/36. b) What is the expected utility from this prize? c) Connie is offered an alternative prize of $169 (no dice is required). Will she accept the alternative prize or roll the dice? d) What is the minimum payment that Connie will accept to forego the roll of the dice? Question 2 Describe Larry, Judy and Carol’s risk preferences. Their utility as a function of income is given as follows: Larry: U L (I) = 10√ I Judy: U J (I) = 3I 2 Carol: U C (I) = 20I Question 3 Mona has received a stock tip from Monica. Monica has told her that XYZ Corp. will
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PS_CH05 - ECON2296-PracticeQuestionsChapter5 Question 1...

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