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?
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '09
 RATNA
 Utility, new job, Natasha

Click to edit the document details