of 8 pages Problem 3- Utility Function For your graduation present from college,
ID: 3333630 • Letter: O
Question
of 8 pages Problem 3- Utility Function For your graduation present from college, your parents are offering you your choice of two alternatives. The first alterative (A1) is to give you a money gift of $19,000. The second alterative (A2) is to make an investment in your name. This investment will quickly have the following two possible outcomes: Outcome Probability Receive $10,000 0.3 Receive $30,000 0.7 Your utility for receiving M thousand dollars is given by the utility function v(M). However, you are uncertain about your true utility function, so you are in the process of constructing this utility function. So far, you have found that v(19-167 and 1(30) = 20 are the utility of receiving $19,000 and $30,000 respectively. You also have concluded that you are indifferent between the tweo alternatives offered to you by your parents. a) Draw the decision tree. b) Use the existing information to find v(10).Explanation / Answer
Decision tree is to choose between Fixed Outcome and Variable Outcome
Decison
Fixed Variable
( 19000) A B
u(19) 10000 30000
u(10) u(30)
0.3 0.7
b) u(19) = 0.3 * u(10) + 0.7*u(30)
16.7 = 0.3*u(10) + 0.7*20
u(10) = 2.7/0.3 =9
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