Question

# Say an individual is faced with the decision of whether to buy auto insurance or not (like before laws in many

states changed). The states of nature are that an accident occurs (with probability .008) and no accident occurs (with probability .992).

Here is the payoff table for the decision maker

State of Nature

Decision No Accident Accident

Purchase insurance -500 -500

Do not purchase Ins. 0 -10000

a-what is the expected monetary value of each decision and which is the best for the decision maker?

b-say the individual is a risk avoider. Show a table with plausible values of utility for the risk avoider, calculate the expected utility of each decision and state which decision is best based on the expected utility idea.

Consider the following two-person, zero-sum game

Player B

Player A b1 b2

A1 -1 2

A2 4 -3

c-explain why neither player has a dominant strategy here.

d-determine the optimal mixed strategy solution.

e-What is the value of the game?

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