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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...

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 XXXXXXXXXXand 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?
. 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), XXXXXXXXXXthat 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 Day Mar 05, 2023

## Solution

Prince answered on Mar 06 2023
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...
SOLUTION.PDF