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1)
a) 𝐸𝑉! = 0.5 × 1000 + 0.25 × 600 = 650$
𝐸𝑉" = 0.6 × 1500 − 0.4 × 500 = 700$
You are (almost) indifferent between the two (if you didn’t use
rounding and you answered one of the two, it’s OK)
2)
a) 𝐸𝑈'()* ,*- = 0.5 × 6050#..# + 0.5 × 4000#..# ≈ 388.04
𝐸𝑈/0- '()* ,*- = 5000#..# ≈ 388.40
3)
a) 𝐸𝑈12(3 = 0.5 × 1000 + 0.5 × 2 × (−550) ≈ −50
𝐸𝑈/0- 12(3 ≈ 0
b)
Second Time
First Time Win (𝒑𝟏 = 𝟎. 𝟓) Lose (𝒑𝟏 = 𝟎. 𝟓)
Win (𝒑𝟏 = 𝟎. 𝟓) Probability : 0.5 × 0.5 = 0.25 Probability : 0.5 × 0.5 = 0.25
Outcome : 1000$ + 1000$ = 2000$ Outcome : 1000$ − 550$ = 450$
Lose (𝒑𝟏 = 𝟎. 𝟓) Probability : 0.5 × 0.5 = 0.25 Probability : 0.5 × 0.5 = 0.25
Outcome : −550$ + 1000$ = 450$ Outcome: −550$ − 550$ = −1100$
4)
a) 𝐸𝑈4566*7- = (−2) × [−(−1000)]#..& ≈ −355.66
5)
!.#!.#!
a) 𝜋(0.8) = (!.#!.#!%(&'!.#)!.#!)$/!.#! ≈ 0.599 ; 𝜋(1) = 1
6) The trick here was to understand that the utility function is:
(𝑐 CDC
𝑢(𝑐, 𝑚) = 3 × BC − 𝑟
CE𝑐) + BC
(𝑚 CDC
− 𝑟CE
𝑚)
𝑢(𝑐) 𝑢(𝑚)
a) (rc = 0; rm = 0):
b) (rc = 1; rm = −2):
From the answer in a, we can infer that the value Batman places
on the car (when he doesn’t expect to buy it) is lower than 2$,
because he is not willing to sacrifice 2$ to get it.
From the answer in b, we can infer that the value Batman places
on the car (when he expects to buy it) is higher than 2$, because
now he is willing to sacrifice 2$ to get it.