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uncertainty

# uncertainty - UBC COMM/FRE 295 Choice Under Uncertainty...

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UBC COMM/FRE 295 Choice Under Uncertainty Question #1 Suppose Smith’s utility function is given by U(m) = m. If Smith has an initial wealth of \$10, 000, which of the following gambles has the highest expected utility? Gamble 1: If the coin comes heads, Smith wins \$100; if tails he loses \$0.50. Gamble 2: If heads, he wins \$200; if tails he loses \$100. Gamble 3: If heads he wins, \$20, 000; if tails he loses \$10, 000. Question #2 Suppose you have been accepted by two universities A and B. A is a much more demanding and also much more prestigious institution than B. B is a safe option in the sense that you know you will do reasonably good there and will land an “adequate” job that pays you m = \$690, 000 for your lifetime. If you manage to survive academically at A, you will land a great job that pays you \$1000, 000. If you do poorly you will end up with a bad job that pays you \$250,000 (all the payments are in present values terms). The probability of surviving at A = 0.6. If your utility function U(m) = m, which university will you attend?

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uncertainty - UBC COMM/FRE 295 Choice Under Uncertainty...

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