Prospect Theory Study Guide

EXPECTED UTILITY THEORY • Goal utility and goal difficulty are combined to determine goal selection according to expected utility theory according to this theory, the goal that is selected is based on its utility and estimated probability of being achieved. Utility refers to the usefulness of the goal in providing satisfaction or happiness • Expected utility = Utility × subjective probability . Question- Explain what you understand  from this theory above and give an example of how it can be useful .

Marginal utility can also become negative True/False

True or false.  Maximizing choices occur when combinations of two goods are made such that they are affordable and achieve the highest indifference curve (i.e. the highest utility).

***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.

Distinguish between form, time, and place utility with at least one real example each.

True/False  Marginal utility refers to the satisfaction or pleasure that occur due to the additional consumption of one more unit

 ‘‘Risk-averse people should only be averse to big gambles with a lot of money at stake. They should jump on any small gamble that is unfair in their favor.’’ Explain why this statement makes sense. Use a utility of income graph like Figure 4.1 to illustrate the statement. For a challenge, demonstrate the statement using a two-state graph like Figure 4.6.  

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…

Explain how utility could be used in a decision where performance is not measured by monetary value.

Ross is a race car driver. The more he races, the happier he is. The level of happiness Ross feels from one additional race increases as he becomes a more experienced driver. We can say that Ross has a decreasing marginal utility from driving race cars.    True False

Choose the best/correct answer. ___1. Anything that satisfied someone. A. Needs                              C. Desires B. Wants                              D. Willingness   ___2. A place where buyers and sellers interact together. A. Social media                   C. Market B. Business Area                 D. Classified Ads   ___3. It is the satisfaction derived from the consumption of a commodity. A. Total utility                      C. Disutility B. Marginal utility                D. Utility   ___4. It is the change of total utility over the change of quantity. A. Total utility                       C. Disutility B. Marginal utility                 D. Utility   ___5. It is the foregone value when a firm is engaged in production. A. Cost                                  C. Revenue B. Profit                                 D. Interest

Distinguish between cardinal and ordinal utility

1. Which of the following behaviors contradict the standard discounted utilitymodel? (A) hyperbolic discounting; (B) context effects; (C) preference for commitments; (D) all of the above. 2. A nudge is a policy solution that is(A) cheap to implement;(B) has a predictable effect on agents’ behavior;(C) does not put additional constraints on agents’ freedom of choice;(D) all of the above.

If you had a vacation budget of $3000 to take vacation(s) this fall, use utility analysis theory to predict which vacation that you would participate in this fall. You need to explain why you would take this vacation instead of another one that you were considering. Assume that you must take the vacation or all life on Earth would perish. I made that last assumption to prevent you from saying that you would just spend it to pay down bills or put it in savings. Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.

Could you please write your own words, not copy-paste or plagiarism issues Question: Discuss the differences between social and market norms(behavioral economics) and what happens when these norms collide. How can an understanding of these two norms help businesses?

Select the correct option : When the expected utility of offer A is larger than offer B, a rational individual would always prefer offer A to offer B. 1. True 2.False

Rick thinks either Morty or Summer broke his TV. Morty and Summer each have to decide simultaneously whether to take the blame or blame the other person. If they both blame the same person (both blame Morty or both blame Summer), the person they blame gets a small punishment and utility of -2, while the blameless person gets a utility of 0. Otherwise (if they both blame the other or both blame themselves), they both get a more severe punishment and a utility of -10.a. Draw the normal (matrix) form of this game, with Morty choosing the row and Summer choosing the column. Does either Morty or Summer have a dominant strategy? Explain your answer. Note: only Morty and Summerare players in this Game. Rick designed the game and is not a player. b. Find all Nash equilibria of this game. c. Suppose instead there are three suspects: Morty, Summer, and Jerry. Otherwise, the rules are the same as before. Draw the normal (matrix) form of the game. Hint: draw three matrices, with Morty choosing the…

Rick thinks either Morty or Summer broke his TV. Morty and Summer each have to decide simultaneously whether to take the blame or blame the other person. If they both blame the same person (both blame Morty or both blame Summer), the person they blame gets a small punishment and utility of -2, while the blameless person gets a utility of 0. Otherwise (if they both blame the other or both blame themselves), they both get a more severe punishment and a utility of -10. a.Draw the normal (matrix) form of this game, with Morty choosing the row and Summer choosing the column. Does either Morty or Summer have a dominant strategy? Explain your answer. Note: only Morty and Summer are players in this Game. Rick designed the game and is not a player. b.Find all Nash equilibria of this game.  c.Suppose instead there are three suspects: Morty, Summer, and Jerry. Otherwise, the rules are the same as before. Draw the normal (matrix) form of the game. d.Find all Nash equilibria of the three-player…

Drawing indifference curves: Carl likes taking the rides at Disneyland, but dislikes standing in line to go on the rides.   Draw a graph where (i) the X axis is the number of rides taken during one day at Disneyland, and (ii) the Y axis is the number of minutes waiting in line during that day at Disneyland. Draw three of Carl’s likely indifference curves. Label and number each one. Write Carl’s likely utility function for items X and Y. Total utility = U = f(X, Y) = ?

True/ false Describe Since a greater utility number indicates that a consumer is better off, utility numbers cannot be negative.