3. (a) Consider the below displayed value functions of two people, Person A (Fig- ure 1) and Person B (Figure 2). The scale of the axes is the same in both figures. f Figure 1: Person A (i) + Compare the two persons regarding all of their preferences that you can speak to based on these figures. Figure 2: Person B (b) In prospect theory, imagine a person who is loss averse, but neither risk averse nor risk seeking. How would their value function look like? Describe in a way that would allow someone to draw the value function. (c) In Greater Anglia trains, going for example from London to Colchester, you can find the following sign (see Figure 3). explain. A PENALTY FARES You may be liable to pay a Penalty Fare if you travel without a valid ticket. A Penalty Fare is £100 plus the price of the appropriate single fare for your intended journey. However, if it is paid within 21 days, the Penalty Fare is reduced to £50 plus the price of the single fare. Explain why the company uses the pricing scheme for penality fares (described in the last two sentences) and why they explain it in this way. Be as specific as possible, referring to models and using terms that you have learned about in the module. (ii) What could be a downside of explaining the scheme in that way? Briefly Figure 3: Sign
3. (a) Consider the below displayed value functions of two people, Person A (Fig- ure 1) and Person B (Figure 2). The scale of the axes is the same in both figures. f Figure 1: Person A (i) + Compare the two persons regarding all of their preferences that you can speak to based on these figures. Figure 2: Person B (b) In prospect theory, imagine a person who is loss averse, but neither risk averse nor risk seeking. How would their value function look like? Describe in a way that would allow someone to draw the value function. (c) In Greater Anglia trains, going for example from London to Colchester, you can find the following sign (see Figure 3). explain. A PENALTY FARES You may be liable to pay a Penalty Fare if you travel without a valid ticket. A Penalty Fare is £100 plus the price of the appropriate single fare for your intended journey. However, if it is paid within 21 days, the Penalty Fare is reduced to £50 plus the price of the single fare. Explain why the company uses the pricing scheme for penality fares (described in the last two sentences) and why they explain it in this way. Be as specific as possible, referring to models and using terms that you have learned about in the module. (ii) What could be a downside of explaining the scheme in that way? Briefly Figure 3: Sign
Chapter7: Uncertainty
Section: Chapter Questions
Problem 7.7P
Related questions
Question
Transcribed Image Text:3.
(a)
Consider the below displayed value functions of two people, Person A (Fig-
ure 1) and Person B (Figure 2). The scale of the axes is the same in both figures.
f
Figure 1: Person A
(i)
+
Compare the two persons regarding all of their preferences that you can speak to based
on these figures.
Figure 2: Person B
(b)
In prospect theory, imagine a person who is loss averse, but neither risk averse
nor risk seeking. How would their value function look like? Describe in a way that would
allow someone to draw the value function.
(c) In Greater Anglia trains, going for example from London to Colchester, you can find the
following sign (see Figure 3).
explain.
A
PENALTY FARES
You may be liable to
pay a Penalty Fare
if you travel without
a valid ticket.
A Penalty Fare is £100 plus the price of the
appropriate single fare for your intended
journey. However, if it is paid within 21 days,
the Penalty Fare is reduced to £50 plus
the price of the single fare.
Explain why the company uses the pricing scheme for penality fares
(described in the last two sentences) and why they explain it in this way. Be as
specific as possible, referring to models and using terms that you have learned about
in the module.
(ii)
What could be a downside of explaining the scheme in that way? Briefly
Figure 3: Sign
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