Probability p of winning the indicated amount-probability

Reference no: EM132463968

Each gamble has 2 outcomes, where you receive a possible gain or a possible loss. Each gamble has a potential loss of $1000 but possible gains increase with each successive gamble (from receiving $1000 to $8000). Since the idea of welfare or "utility" is a relative one and purely subjective. I have specified (numerically, in units known as "utils") your welfare, should you suffer a $1000 loss in a gamble, your utility (welfare) from the loss as -10.

a) Each gamble ( one gamble per row of the table) presents you with a probability p of winning the indicated amount and probability (1-p) of losing the corresponding amount (specified respectively in the first two columns). In the fourth column ("probability of gain") list that about what probability or likelihood of winning would leave you indifferent between taking that specific gamble in real life or just walking away from it, in which case you both win and lose nothing ($0). There is no upfront cost to you from either choice. For each gamble, list this probability in the corresponding cell.

b) Now, for each gamble, use the probability you listed to determine the corresponding level of welfare or utility you get from winning the corresponding prize money. We're assuming that walking away from a gamble, which both gives you and costs you no money, your level of utility or welfare is itself zero: U(0)=0. So once you've determined your own value of p for a given gamble, you can solve for your implied U(gain) through:

0 = pU(gain) + (1-p)U(loss)

c) Once you've done this for each of the eights gambles, graph your values for U(gain) (with dollars on the horizontal axis and U(gain) on the vertical axis.) Is your graph concave everywhere? Convex everywhere? Concave for some level of prize money and convex for others?

Your answer to this question should consist of your completed version Table 1 and the corresponding graph for U(gain).

Reference no: EM132463968

Questions Cloud

Compute the after-tax cost : Assuming a 2l percent marginal tax rate, compute the after-tax cost of the business expenses:-$5,600 premium on business property and casualty insurance.

Calculate the value of the constant a : The breaking strength X of a concrete slab has a density function (x)= Ae(-x/100)dx for breaking strength values in the range, 120 = x = 150.

Determine two accounts in the choice hotels income statement : Determine two accounts in the Choice Hotels income statement that show the biggest change over the past 3 years? What information in the 10-K report

Calculate the standard cost per unit for direct materials : Last year's sales were expected to total 50,000 units. Calculate standard cost per unit for direct materials, direct labor, and variable manufacturing overhead

Probability p of winning the indicated amount-probability : Each gamble ( one gamble per row of the table) presents you with a probability p of winning the indicated amount and probability (1-p) of losing

Role of ethics and the various internal control processes : Role of ethics and the various internal control processes that need to be in place and Body of the report with sections to answer the above issues.

Data flow diagram of revenue cycle : Describe the various transaction cycles, financial reporting, management reporting systems and e-commerce and the role of ethics and the various internal

What fee would preserve normans original expectation : a) What fee would preserve Normans original expectation of a 20% return by the end of the year?

What would be the marketing roi under the conditions : The coupon redemptions were used by people who would have purchased coffee at the usual price, what would be the Marketing ROI under these conditions?

User Account

All Pages