Consider two friends Anna and Elsa whose gains and losses are listed as follows: Anna's investment is worth $2.5 million (decreased from $3.5 to $2.5 million) Elsa's investment is worth $2.2 million (increased from $2 to $2.2 million) For cach of them writc down the refcrence utility function (First determine the reference point (use a parameter) and derive reference utility function for each).

Consider two friends Anna and Elsa whose gains and losses are listed as follows: Anna's investment is worth $2.5 million (decreased from $3.5 to $2.5 million) Elsa's investment is worth $2.2 million (increased from $2 to $2.2 million) For cach of them writc down the refcrence utility function (First determine the reference point (use a parameter) and derive reference utility function for each).

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter3: Preferences And Utility

Section: Chapter Questions

Problem 3.7P

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Sanjay won a poker game against his friends. Now he has to choose between $600 (the winnings) and the chance to play a new game. In this new game, Sanjay has a 50% chance of winning nothing and a 50% chance of winning $1000. The following graph presents the utility function of Sanjay with respect to money: 1. By how much money would his winnings need to increase or decrease so that Sanjay isindifferent between the $600 and the new game? At a different table, Juan wins $800 in a blackjack game. Similarly, he has to choose between $800 or the chance to win a new game. In this game, Juan has a 45% chance of winning nothing and a 55% chance of winning $1000. The following graph presents the utility function of Juan with respect to money: 2. By how much money would his winnings need to increase or decrease so that Juan is indifferent between the $800 and the new game? Please enter a positive number for an increase or a negative number for a decrease.
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* Kate loves cookies and chocolates. The price of cookie is $1 per piece for the first 10 pieces and $4 per piece thereafter, while the price of chocolate is $2 for the first 10 pieces and $10 thereafter. a) Kate’s has income $100. Placing the cookie on the horizontal axis and chocolate on the vertical axis, carefully sketch the budget set for Kate. Be sure to plot and label points of interests (such as kink points, intercepts and the slopes. b ) Suppose cookies(x1) and chocolates(x2) are perfect substitutes to Kate, and she is always willing to substitute two cookies for one chocolate. De- rive Kate’s utility function. c) Giventheinformationabove,findKate’sdemandforcookiesandchoco- lates. please express final numerical answers in decimal format
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