Diminishing marginal utility .

Question

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Answer 1

Question

Chapter 14, Problem 9PA

Sub part (a):

To determine

Diminishing marginal utility.

Sub part (a):

Expert Solution

Explanation of Solution

The utility function is W12 . Since the power function is less than one, the marginal utility will be diminishing. It implies that the person is risk averse.

Figure 1 illustrates the diminishing marginal utility.

Principles of Macroeconomics (MindTap Course List), Chapter 14, Problem 9PA

In Figure 1, the horizontal axis measures the quantity of wealth and the vertical axis measures the utility. When the quantity of wealth increases then the additional utility decreases.

Economics Concept Introduction

Concept introduction:

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Sub Part (b):

To determine

Expected value.

Sub Part (b):

Expert Solution

Explanation of Solution

Since the value is sure, the probability is 1. Expected value of A can be calculated as follows:

Expected value=Probability×Wealth=1×4,000,000=4,000,000

Expected value of A is $4,000,000.

Expected value of B can be calculated as follows.

Expected value=(Probability1×Wealth1)+(Probability2×Wealth2)=(0.6×1,000,000)+(0.4×9,000,000)=600,000+3,600,000=4,200,000

Expected value of B is $4,200,000. Thus, B offers higher value.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Sub part (c):

To determine

Expected utility.

Sub part (c):

Expert Solution

Explanation of Solution

Expected utility of A can be calculated as follows:

Expected value=Wealth12=4,000,00012=2,000

Expected utility of A is $2,000.

Expected utility of B can be calculated as follows.

Expected value=(Probability1×Wealth112)+(Probability2×Wealth212)=(0.6×1,000,00012)+(0.4×9,000,00012)=(0.6×1,000)+(0.4×3,000)=600+1,200=1,800

Expected utility of B is $1,800.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Sub part (d):

To determine

greaterExpected utility.

Sub part (d):

Expert Solution

Explanation of Solution

Since the expected utility from B is greater than A, the person should select A.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

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a) Assume there are two firms, 1 and 2, competing as Cournot duopolists in a market, selling a homogeneous product. Demand is given by p = 36 – (q1 + q2), where p is price and q1 and q2 are the outputs of firms 1 and 2 respectively. Each firm faces a marginal cost of 6 per unit of output and no fixed cost. Find each firm’s optimal output, the price at which they sell, each firm’s profit , and consumer surplus. b) Now assume that the firms face the same costs, but horizontally differentiate their product, so that firm 1 faces demand p1 = 36 – (q1 + q2/2) and firm 2 faces demand p2 = 36 – (q1/2 + q2). Assume Cournot competition. Calculate the new equilibrium prices and outputs for each firm, consumer surplus and profits. c) Now assume that rather than facing a given degree of product differentiation, the firms can choosehowdifferentiatedtheirproductsare.Thisisequivalenttoinversedemandequationsp1 =36 –(q1 +θq2)andp2 =36–(θq1 +q2),0≤θ≤1,withθdeterminedbythefirms’choicesofproduct…

Assume there are two firms, 1 and 2, competing as Cournot duopolists in a market, selling a homogeneous product. Demand is given by p = 36 – (q1 + q2), where p is price and q1 and q2 are the outputs of firms 1 and 2 respectively. Each firm faces a marginal cost of 6 per unit of output and no fixed cost. Find each firm’s optimal output, the price at which they sell, each firm’s profit , and consumer surplus.

What is the relationship between the humanities and self identity

Answer 2

Question

Chapter 14, Problem 9PA

Sub part (a):

To determine

Diminishing marginal utility.

Sub part (a):

Expert Solution

Explanation of Solution

The utility function is W12 . Since the power function is less than one, the marginal utility will be diminishing. It implies that the person is risk averse.

Figure 1 illustrates the diminishing marginal utility.

Principles of Macroeconomics (MindTap Course List), Chapter 14, Problem 9PA

In Figure 1, the horizontal axis measures the quantity of wealth and the vertical axis measures the utility. When the quantity of wealth increases then the additional utility decreases.

Economics Concept Introduction

Concept introduction:

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Sub Part (b):

To determine

Expected value.

Sub Part (b):

Expert Solution

Explanation of Solution

Since the value is sure, the probability is 1. Expected value of A can be calculated as follows:

Expected value=Probability×Wealth=1×4,000,000=4,000,000

Expected value of A is $4,000,000.

Expected value of B can be calculated as follows.

Expected value=(Probability1×Wealth1)+(Probability2×Wealth2)=(0.6×1,000,000)+(0.4×9,000,000)=600,000+3,600,000=4,200,000

Expected value of B is $4,200,000. Thus, B offers higher value.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Sub part (c):

To determine

Expected utility.

Sub part (c):

Expert Solution

Explanation of Solution

Expected utility of A can be calculated as follows:

Expected value=Wealth12=4,000,00012=2,000

Expected utility of A is $2,000.

Expected utility of B can be calculated as follows.

Expected value=(Probability1×Wealth112)+(Probability2×Wealth212)=(0.6×1,000,00012)+(0.4×9,000,00012)=(0.6×1,000)+(0.4×3,000)=600+1,200=1,800

Expected utility of B is $1,800.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Sub part (d):

To determine

greaterExpected utility.

Sub part (d):

Expert Solution

Explanation of Solution

Since the expected utility from B is greater than A, the person should select A.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

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Answer 3

Question

Chapter 14, Problem 9PA

Sub part (a):

To determine

Diminishing marginal utility.

Sub part (a):

Expert Solution

Explanation of Solution

The utility function is W12 . Since the power function is less than one, the marginal utility will be diminishing. It implies that the person is risk averse.

Figure 1 illustrates the diminishing marginal utility.

Principles of Macroeconomics (MindTap Course List), Chapter 14, Problem 9PA

In Figure 1, the horizontal axis measures the quantity of wealth and the vertical axis measures the utility. When the quantity of wealth increases then the additional utility decreases.

Economics Concept Introduction

Concept introduction:

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Sub Part (b):

To determine

Expected value.

Sub Part (b):

Expert Solution

Explanation of Solution

Since the value is sure, the probability is 1. Expected value of A can be calculated as follows:

Expected value=Probability×Wealth=1×4,000,000=4,000,000

Expected value of A is $4,000,000.

Expected value of B can be calculated as follows.

Expected value=(Probability1×Wealth1)+(Probability2×Wealth2)=(0.6×1,000,000)+(0.4×9,000,000)=600,000+3,600,000=4,200,000

Expected value of B is $4,200,000. Thus, B offers higher value.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Sub part (c):

To determine

Expected utility.

Sub part (c):

Expert Solution

Explanation of Solution

Expected utility of A can be calculated as follows:

Expected value=Wealth12=4,000,00012=2,000

Expected utility of A is $2,000.

Expected utility of B can be calculated as follows.

Expected value=(Probability1×Wealth112)+(Probability2×Wealth212)=(0.6×1,000,00012)+(0.4×9,000,00012)=(0.6×1,000)+(0.4×3,000)=600+1,200=1,800

Expected utility of B is $1,800.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Sub part (d):

To determine

greaterExpected utility.

Sub part (d):

Expert Solution

Explanation of Solution

Since the expected utility from B is greater than A, the person should select A.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 4

Question

Chapter 14, Problem 9PA

Sub part (a):

To determine

Diminishing marginal utility.

Sub part (a):

Expert Solution

Explanation of Solution

The utility function is W12 . Since the power function is less than one, the marginal utility will be diminishing. It implies that the person is risk averse.

Figure 1 illustrates the diminishing marginal utility.

Principles of Macroeconomics (MindTap Course List), Chapter 14, Problem 9PA

In Figure 1, the horizontal axis measures the quantity of wealth and the vertical axis measures the utility. When the quantity of wealth increases then the additional utility decreases.

Economics Concept Introduction

Concept introduction:

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Sub Part (b):

To determine

Expected value.

Sub Part (b):

Expert Solution

Explanation of Solution

Since the value is sure, the probability is 1. Expected value of A can be calculated as follows:

Expected value=Probability×Wealth=1×4,000,000=4,000,000

Expected value of A is $4,000,000.

Expected value of B can be calculated as follows.

Expected value=(Probability1×Wealth1)+(Probability2×Wealth2)=(0.6×1,000,000)+(0.4×9,000,000)=600,000+3,600,000=4,200,000

Expected value of B is $4,200,000. Thus, B offers higher value.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Sub part (c):

To determine

Expected utility.

Sub part (c):

Expert Solution

Explanation of Solution

Expected utility of A can be calculated as follows:

Expected value=Wealth12=4,000,00012=2,000

Expected utility of A is $2,000.

Expected utility of B can be calculated as follows.

Expected value=(Probability1×Wealth112)+(Probability2×Wealth212)=(0.6×1,000,00012)+(0.4×9,000,00012)=(0.6×1,000)+(0.4×3,000)=600+1,200=1,800

Expected utility of B is $1,800.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Sub part (d):

To determine

greaterExpected utility.

Sub part (d):

Expert Solution

Explanation of Solution

Since the expected utility from B is greater than A, the person should select A.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

Chapter 14, Problem 9PA

Sub part (a):

To determine

Diminishing marginal utility.

Sub part (a):

Expert Solution

Explanation of Solution

The utility function is W12 . Since the power function is less than one, the marginal utility will be diminishing. It implies that the person is risk averse.

Figure 1 illustrates the diminishing marginal utility.

Principles of Macroeconomics (MindTap Course List), Chapter 14, Problem 9PA

In Figure 1, the horizontal axis measures the quantity of wealth and the vertical axis measures the utility. When the quantity of wealth increases then the additional utility decreases.

Economics Concept Introduction

Concept introduction:

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Sub Part (b):

To determine

Expected value.

Sub Part (b):

Expert Solution

Explanation of Solution

Since the value is sure, the probability is 1. Expected value of A can be calculated as follows:

Expected value=Probability×Wealth=1×4,000,000=4,000,000

Expected value of A is $4,000,000.

Expected value of B can be calculated as follows.

Expected value=(Probability1×Wealth1)+(Probability2×Wealth2)=(0.6×1,000,000)+(0.4×9,000,000)=600,000+3,600,000=4,200,000

Expected value of B is $4,200,000. Thus, B offers higher value.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Sub part (c):

To determine

Expected utility.

Sub part (c):

Expert Solution

Explanation of Solution

Expected utility of A can be calculated as follows:

Expected value=Wealth12=4,000,00012=2,000

Expected utility of A is $2,000.

Expected utility of B can be calculated as follows.

Expected value=(Probability1×Wealth112)+(Probability2×Wealth212)=(0.6×1,000,00012)+(0.4×9,000,00012)=(0.6×1,000)+(0.4×3,000)=600+1,200=1,800

Expected utility of B is $1,800.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Sub part (d):

To determine

greaterExpected utility.

Sub part (d):

Expert Solution

Explanation of Solution

Since the expected utility from B is greater than A, the person should select A.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Answer 6

Chapter 14, Problem 9PA

Sub part (a):

To determine

Diminishing marginal utility.

Sub part (a):

Expert Solution

Explanation of Solution

The utility function is W12 . Since the power function is less than one, the marginal utility will be diminishing. It implies that the person is risk averse.

Figure 1 illustrates the diminishing marginal utility.

Principles of Macroeconomics (MindTap Course List), Chapter 14, Problem 9PA

In Figure 1, the horizontal axis measures the quantity of wealth and the vertical axis measures the utility. When the quantity of wealth increases then the additional utility decreases.

Economics Concept Introduction

Concept introduction:

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Answer 7

Chapter 14, Problem 9PA

Sub part (a):

To determine

Diminishing marginal utility.

Answer 8

Sub part (a):

Expert Solution

Explanation of Solution

The utility function is W12 . Since the power function is less than one, the marginal utility will be diminishing. It implies that the person is risk averse.

Figure 1 illustrates the diminishing marginal utility.

Principles of Macroeconomics (MindTap Course List), Chapter 14, Problem 9PA

In Figure 1, the horizontal axis measures the quantity of wealth and the vertical axis measures the utility. When the quantity of wealth increases then the additional utility decreases.

Answer 9

Sub part (a):

Expert Solution

Answer 10

Sub part (a):

Expert Solution

Answer 11

Expert Solution

Answer 12

Economics Concept Introduction

Concept introduction:

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Answer 13

Sub Part (b):

To determine

Expected value.

Sub Part (b):

Expert Solution

Explanation of Solution

Since the value is sure, the probability is 1. Expected value of A can be calculated as follows:

Expected value=Probability×Wealth=1×4,000,000=4,000,000

Expected value of A is $4,000,000.

Expected value of B can be calculated as follows.

Expected value=(Probability1×Wealth1)+(Probability2×Wealth2)=(0.6×1,000,000)+(0.4×9,000,000)=600,000+3,600,000=4,200,000

Expected value of B is $4,200,000. Thus, B offers higher value.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Answer 14

Sub Part (b):

To determine

Expected value.

Answer 15

Sub Part (b):

Expert Solution

Explanation of Solution

Since the value is sure, the probability is 1. Expected value of A can be calculated as follows:

Expected value=Probability×Wealth=1×4,000,000=4,000,000

Expected value of A is $4,000,000.

Expected value of B can be calculated as follows.

Expected value=(Probability1×Wealth1)+(Probability2×Wealth2)=(0.6×1,000,000)+(0.4×9,000,000)=600,000+3,600,000=4,200,000

Expected value of B is $4,200,000. Thus, B offers higher value.

Answer 16

Sub Part (b):

Expert Solution

Answer 17

Sub Part (b):

Expert Solution

Answer 18

Expert Solution

Answer 19

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Answer 20

Sub part (c):

To determine

Expected utility.

Sub part (c):

Expert Solution

Explanation of Solution

Expected utility of A can be calculated as follows:

Expected value=Wealth12=4,000,00012=2,000

Expected utility of A is $2,000.

Expected utility of B can be calculated as follows.

Expected value=(Probability1×Wealth112)+(Probability2×Wealth212)=(0.6×1,000,00012)+(0.4×9,000,00012)=(0.6×1,000)+(0.4×3,000)=600+1,200=1,800

Expected utility of B is $1,800.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Answer 21

Sub part (c):

To determine

Expected utility.

Answer 22

Sub part (c):

Expert Solution

Explanation of Solution

Expected utility of A can be calculated as follows:

Expected value=Wealth12=4,000,00012=2,000

Expected utility of A is $2,000.

Expected utility of B can be calculated as follows.

Expected value=(Probability1×Wealth112)+(Probability2×Wealth212)=(0.6×1,000,00012)+(0.4×9,000,00012)=(0.6×1,000)+(0.4×3,000)=600+1,200=1,800

Expected utility of B is $1,800.

Answer 23

Sub part (c):

Expert Solution

Answer 24

Sub part (c):

Expert Solution

Answer 25

Expert Solution

Answer 26

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Answer 27

Sub part (d):

To determine

greaterExpected utility.

Sub part (d):

Expert Solution

Explanation of Solution

Since the expected utility from B is greater than A, the person should select A.

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.

Answer 28

Sub part (d):

To determine

greaterExpected utility.

Answer 29

Sub part (d):

Expert Solution

Explanation of Solution

Since the expected utility from B is greater than A, the person should select A.

Answer 30

Sub part (d):

Expert Solution

Answer 31

Sub part (d):

Expert Solution

Answer 32

Expert Solution

Answer 33

Economics Concept Introduction

Concept introduction:

Risk is the future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty situation that an investor is willing to take to realize a gain from an investment.

Risk aversion: Risk aversion can be defined as it is a dislike of an uncertainty.

Marginal utility: Marginal utility refers to the additional units of satisfaction derived from one more additional unit of goods and services.

Diminishing marginal utility: Diminishing marginal utility refers to a decrease in the additional satisfaction as a result of increasing the consumption.