resent the classical model of choice under uncertainty. What are the five assump- tions which characterize the Von-Neumann-Morgenstern expected utility repre- sentation
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Present the classical model of choice under uncertainty. What are the five assump- tions which characterize the Von-Neumann-Morgenstern expected utility repre- sentation?
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- can you explain the Axioms of expected utility by The von Neumann and Morgenstern (1944)Nutritional economics. Suppose we are considering a hungry individual in the Grossman model deciding what to have for dinner. His options are listed in Table 3.2. Each dish has an effect on the level of the home good Z and health H. a. Suppose the diner’s single-period utility function is as follows:U =3Z +HIf the diner is trying to maximize his single-period utility, and he can only select one item from Table 3.2, which meal would he choose? b. If the diner is instead trying to maximize his lifetime utility and not just his single period utility, how might your answer to Exercise 16(a) change? Is he likely to value Z or H more in the lifetime context than the single-period context? Explain your answer, and be sure to invoke the concept of a capital goodIndicate whether the statement is true or false, and justify your answer.Expected utility theory offers one possible valuation function that satisfies the properties of completeness, transitivity, and independence of preferences under uncertainty.
- With the use of graphs state how the Consumer’s optimum in the Fisher’s Intertemporal Choice Model.Nutritional economics. Suppose we are considering a hungry individual in the Gross-man model deciding what to have for dinner. His options are listed in Table 3.2. Each dish has an effect on the level of the home good Z and health H.a. Suppose the diner’s single-period utility function is as follows: U = 3Z + HIf the diner is trying to maximize his single-period utility, and he can only select one item from Table 3.2, which meal would he choose?b. A miracle pill is discovered that halves the negative health impact of cookies. How does this impact the diner’s choice?c. What effect does the miracle pill have on the diner’s health H? Interpret this result.Does this mean the diner would be better off without the miracle pill?d. If the diner is instead trying to maximize his lifetime utility and not just his single-period utility, how might your answer to Exercise 16(a) change? Is he likely to value Z or H more in the lifetime context than the single-period context? Explain your answer, and…Are the following preferences consistent with von Neumann Morgenstern’s axioms to maximize expected utility? Explain. a. You would rather have a sure $200 to a gamble with p=0.7 chance of $200, p=0.1 chance of $50, p=0.2 chance of $300. b. You prefer the gamble of p=2/3 chance of $300 and p=1/3 chance of $50 than a sure $250 win.
- Suppose an individual faces uncertainty over the following set of monetary outcomes A = {-10, 4, 8, 13, 22} Suppose the individual abides to the vNM axioms. a) How can you represent her preference relation over gambles over A? b) Is this representation unique? c) Is it the only one satisfying the expected utiltiyproperty? d) Suppose u(-10) = 0, u(22) = 1. Also assume that u(4) = 0.5, u(8) = 0.55 and u(13) =0.65. Can you build a gamble that is indifferent to the degenerate gamble that gives 4 with certainty? What is the utility of the following gambles p = (0.1, 0.2, 0.5, 0.2, 0), q = (0.2, 0.2, 0.2, 0.2, 0.2), r =(0.3, 0, 0.2, 0.1, 0.4). How does the individualrank these three gambles?***PLEASE NOTE: QUESTION HAS TWO PARTS REQUIRING ANSWER*** Q: Johnny Football has a utility function of the form ? = √?. Johnny is beginning his senior year of college football. If he is not seriously injured, he will receive a $1,000,000 contract for playing professional football. If any injury ends his football career, he will take a job as a refuse removal facilitator in his hometown that pays $10,000. There is a 10% chance that Johnny will be injured badly enough to end his career. a. What is Johnny’s expected utility? b. How much would Johnny be willing to pay to remove the financial riskhe faces? That is, what $p would he pay for a $1,000,000 insurancepolicy so that he would have $1,000,000-$p even if he had a seriousinjury? Assume he wouldn’t work for $10,000 if he had the insuranceand he was injured. Hint: You should set his utility with certainty(U($1,000,000-$p)) equal to his expected utility with risk (found inpart a) and solve for p.Behavioral economics recognizes that people use System 1 to make decisions more often than they use System 2. Which of the following is an impldecision-making process?A majority of decisions are not made according to the neoclassical assumption of rational behavior.Most decisions are made following a careful calculation of costs and benefits.Even though most decisions are irrational, the neoclassical model still accurately. predicts outcomes.System 1 is best at making optimal decisions.
- The consumer theory and the expected utility theory are two theories. Give a policy recommendation on how individuals decision making is affected in each theory.Economics Consider a potential criminal with a lawful income of $121. Potential loot from robbery is $75. The probability of being caught and imprisoned is 0.50 and a prison term for this type of crime is 0.33 units of time. Round to one decimal place in all calculations. Utility is given by: Utility = (income)1/2 A. Calculate the guaranteed utility from lawful income and the expected utility of committing the crime. What will the potential criminal do? Explain why. Would your answer change if there were an anguish cost of 1 util involved? Explain. B. Suppose all the information given above holds true, except there is no anguish cost. You are a city official who has some extra room in the budget to dedicate towards fighting crime. For the use of these resources, you can choose between either increasing the length of prison term for criminals to 0.595 units of time or investing in GIS technologies and improved policing strategies that will increase the probability of criminals being…You must have learned that we cannot be always rational decision maker. Now, Tell us specifically about your experience when you made a nonrational decision making. How does this decision-making align with the satisfying model and the intuition model? (Show an example for both models) Satisficing model Intuition model