Asked by
Sierie Anne Caduada
on Oct 14, 2024
Verified
Oskar's preferences over gambles in which the probability of events 1 and 2 are both 1/2 can be represented by the von Neuman-Morgenstern utility function .5y.51 .5y.52, where y1 is his consumption if event 1 happens and y2 is his consumption if event 2 happens.A gamble that allows him a consumption of $9 if event 1 happens and $25 if event 2 happens is exactly as good for Oskar as being sure to have an income of
A) $12.5.
B) $9.
C) $16.
D) $17.
E) None of the above.
Von Neuman-Morgenstern
Refers to the theory of expected utility, formulated by John von Neumann and Oskar Morgenstern, which addresses choices made under conditions of risk.
Expected Utility Function
A mathematical expression that represents a consumer's preference for uncertain outcomes, weighting each outcome by its probability of occurrence.
- Assess the expected utility and incorporate it into financial planning and decisions.
- Assess the projected worth of a speculative endeavor and compare that with absolute results to formulate judicious choices.
- Explain the concept of certainty equivalent and its relation to risk attitudes.
Verified Answer
CB
Learning Objectives
- Assess the expected utility and incorporate it into financial planning and decisions.
- Assess the projected worth of a speculative endeavor and compare that with absolute results to formulate judicious choices.
- Explain the concept of certainty equivalent and its relation to risk attitudes.