In this question, we will use the theory of choice under uncertainty to check th

Question

In this question, we will use the theory of choice under uncertainty to check this claim (a) Suppose that two risk averse horse owners, A and B, are considering whether to enter their horses into a race against the other's. Show that if each owner assigns the same probability to the possibility that A's horse will win then neither is willing to bet against the other, even if they are allowed to "give odds". (Giving odds means that they might agree to bets in which A (for example) might agree to pay B twice (or half, or ten times) what A bet if B's horse wins.) (b) Show that one can construct a bet (with appropriate odds) that both would agree to if A assigns a higher probability to their own horse winning than B assigns to A's horse winning Your arguments can be mathematical or graphical. It might prove useful to think about the marginal rate of substitution between consumption in different "states,'" horse wins the race. Also, assur races never end in a tie

Explanation / Answer

(a) People make choices on the basis of their self-interest. From observing people's behaviour, the economist is able to assume his economic decision on the basis of it. Limitation of choices give them more satisfaction power. Choice theory is one of the important theory that deals and illuminate the logical decision power of the individual .

In this case the choices among the two individuals is that whether they should send there horses in the race yes or no that is horse A and horse B. The probability totally depend on their self interest a d decision power.

The probability of horse 1 depend on the number of race done and the chances of winning of horse A

For illustration- Horse A ran 5 times out of which it won 3 times the probability would be

3/5.

(b)In this case it is mentioned that of A assigns a higher probability to their own horse winning than B. We can explain it through a example-

The number of time race done is 15. The horse A won 6 times and horse B won 7 times. Remaining was a tie.

The probability of Horse A winning the race would be 6/15.

The probability of Horse B winning the race would be 7/15.

The probability of tie between the two horses would be 2/15.

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.