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Washington State University *

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Course

212

Subject

Economics

Date

Feb 20, 2024

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1

Uploaded by DeaconCloverSheep15

Report
- Consider the following three lotteries Lottery 1: Alternative 1: 45% chance of earning $1200 and 55% chance of earning nothing; Alternative 2: earning $40 for sure Lottery 2: Alternative 1: 65% chance of earning $1200 and 35% chance of earning $40; Alternative 2: earning $300 for sure Lottery 3: Alternative 1: 80% chance of earning $1200 and 20% chance of earning $300; Alternative 2: earning $600 for sure a) Suppose a decision maker has thus far assigned utilities as follows: U(1200)=1, U(0)=0. Suppose a decision maker is indifferent between the two alternatives offered in each of the above three lotteries. Use this information to compute U(40), U(300), U(600). b) ) Choose between alternative A1 and A2 in the decision tree by maximizing expected utility. $40 0.3 O 0.7 $300 Al S600 ] O 0.2 08 $300 A2 ] $1200 O 0.1 0.9 $O
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