EBK STUDY GUIDE FOR MANKIW'S BRIEF PRIN
7th Edition
ISBN: 8220103455329
Author: Mankiw
Publisher: CENGAGE L
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Question
Chapter 9, Problem 9PA
Sub part (a):
To determine
Diminishing
Sub Part (b):
To determine
Expected value.
Sub part (c):
To determine
Expected utility.
Sub part (d):
To determine
greaterExpected utility.
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Students have asked these similar questions
Jamal has autility function U=W1/2,where W is his wealth in millions of dollars and U is the utitlity he obtains from that wealth.Inthe final stage of a game show,the host offers offers Jamal a choice(A)$4 million dollar for sure,or (B) a gamble that pays $1 million with probability 0.6 and $9million with probability 0.4.
a.Graph Jamal's utitility function.Is he risk averse?Explain.
b.Does A or B offers Jamal a higher expected price?Explain your reasoning with appropriate calculations.
c.Does A or B offer Jamal a higher expected utility?
d.Should Jamal pick A or B? Why?
Max is thinking of starting a pinball palace near a large Melbourne university. His utility is given by u(W) = 1 - (5,000/W), where W is his wealth. Max's total wealth is $15,000. With probability p = 0.7 the palace will succeed and Max's wealth will grow from $15,000 to $x. With probability 1 - p the palace will be a failure and he’ll lose $10,000, so that his wealth will be just $5,000.
What is the smallest value of x that would be sufficient to make Max want to invest in the pinball palace rather than have a wealth of $15,000 with certainty?
(Please round your final answer to the whole dollar, if necessary)
The following table shows the relationship between your wealth (in thousands of
dollars) and your utility:
Wealth
Utility.
15.0
10
23.0
15
30.0
20
36.0
25
41.0
30
46.0
35
50.0
You can invest in asset A, which offers a riskless payoff of $15,000 or in asset B, which
pays $5,000 with 40% probability and $25,000 with 60% probaility. Which investment
do you choose?
A. B, because its expected utility of 31.6 is greater than the utility of A.
O B. A, because it is riskless.
OC. A, because its utility is greater than the expected utility of B, which is 28.4.
O D. B, because its expected utility of 30.6 is greater than the utility of A.
Chapter 9 Solutions
EBK STUDY GUIDE FOR MANKIW'S BRIEF PRIN
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