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prob1 - Problem Set 1 ECOS3012 Strategic Behavior 2011 Note...

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Problem Set 1 Note. Just a couple of problems to get the hang of “Expected Utility” calculation and some of its implications. Solutions will be taken up during Lecture 2. Problem 1. Consider an urn filled with 100 balls, colored blue, red and yellow in some unknown proportions. One ball will be drawn from this urn and the amount of money you win depends on the color of the ball that is drawn. How much you win depends on the lottery/action that you will choose. Since the payoff depends only on the color of the ball that is drawn, there are 3 states of the world, Ω = { r, b, y } . The four possible actions available to you are shown in the table below: f 1 for instance is the lottery that pay $100 if r color ball is drawn and $0 otherwise. b y r f 1 0 0 100 f 2 100 0 0 f 3 0 100 100 f 4 100 100 0 Suppose u ( x ) denotes the utility of receiving $ x of money and that the agent believes
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