1. Why might some prefer a prix fixe (fixed price) dinner costing about the same as an à la carte one (where you pay individually for each item)? (Assume the food is identical.)2. Consider a person...

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1. Why might some prefer a prix fixe (fixed price) dinner costing about the same as an à la carte one (where you pay individually for each item)? (Assume the food is identical.) 2. Consider a person with the following utility function over wealth: u(w) = ew, where e is the exponential function (approximately equal to 2.7183) and w = wealth in hundreds of thousands of dollars.  Suppose that this person has a 40% chance of wealth of $100,000 and a 60% chance of wealth of $2,000,000 as summarized by P(0.40, $100,000, $2,000,000). a. What is the expected value of wealth? b. Construct a graph of this utility function (recall your excel?). c. Is this person risk averse, risk neutral, or a risk seeker? d. What is this person’s certainty equivalent for the prospect? 3. Consider two prospects. Problem 1: Choose between Prospect A: $2,500 with probability 0.33   $2,400 with probability 0.66   Zero with probability 0.01 Prospect B: $2,400 with probability 1.00   Problem 2: Choose between   Prospect C: $2,500 with probability 0.33   Zero with probability 0.67 Prospect D: $2,400 with probability 0.34   Zero with probability 0.66   It has been shown by Daniel Kahneman and Amos Tversky (1979, “Prospect theory: An analysis of decision under risk,” Econometrica 47(2), 263-291) that more people choose B when presented with problem 1 and when presented with problem 2, most people choose C. These choices violate expected utility theory. Why?
Answered Same DayMar 05, 2023

Answer To: 1. Why might some prefer a prix fixe (fixed price) dinner costing about the same as an à la carte...

Prince answered on Mar 06 2023
33 Votes
Sheet1
    QUESTION TWO PART A
    e(u) =[50% x 40%] +[60% x 10] =[0.5 x 0.4] + [0.6 x 10]=0.4+6= 6.2
    
u(P)= [ 60% x e^ 10]+[40% x e^0.5 ]=[0.6e^10]+[0.4e^0.5] =13,215.87948 +0.65949= 13216.53897
    QUESTION TWO PART B.
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    QUESTION TWO PART...
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