Reference no: EM133224115

Behavioral Economics

Tiffany is considering investing in one of two investment projects. She has two options: The first project is conducted by the Australian government, which generates a certainty profit of $70k, and the second project is managed by a private firm which generates $85k an hour with a 50 percent chance and $45k an hour with 50 percent chance. Assume that Tiffany can only invest in one project, helping her in making decisions in the following scenarios. (Hint: you can ignore the unit k when calculating the value)

1. Suppose Tiffany's utility of a payment ?? is u(x)=1.5·√x . Which project will she prefer according to the expected utility theory? (remain two digits for decimals)

2. Now suppose Tiffany takes the worst possible remuneration out of the two projects as her reference point. Her value function is v(x)=1.5·√x for gains and v(-x)= -3·√|-x| for losses. Which project would she prefer? Does her choice change if she instead takes the best possible remuneration out of the two projects as her reference point? Provide all the steps of the calculations.