Utility index and selecting choices based on utility

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Reference no: EM13114460

Part 1

Entrepreneur Jones has a utility index of 5 for a loss of $1,000, and 12 for a profit of $3,000. He says that he is indifferent between $10 for certain and the following lottery: a 0.4 chance at a $1,000 loss and a 0.6 chance at a $3,000 profit. What is his utility index for $10?

Part 2

Suppose that Smith has a utility function U(x) = x^(2/3) where x is in dollars (0 < x < 100). Smith is offered the following choices:

A: $8 for sure.

B: A lottery with a one-half chance for zero dollars and a one-half chance for $64.

Which choice would you predict Smith will choose?

Reference no: EM13114460

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