Economics Problem dealing with Probability

LegendofLink · #1 02-12-2007, 10:19 PM

I have an economics problem dealing with probability, the people here (econ majors) probably have more knowledge on these matters than I, hoping for some feedback. Apparently "maybe" and "need more info" are possible answers for these as well.

A) Would a risk-averse person accept a bet where he wins $550 with 10% probability, $175 with 30% probability and loses $150 with 60% probability?
B) What is the expected payoff of the above bet?
C) What is the expected utility of accepting the above bet if the initial wealth is $1050 and the utility function is U = W1/2?
D) Given the above utility function and initial wealth, would the person accept the bet?

MyTurn2Raise · #2 02-12-2007, 10:37 PM

wtf are you doing in college if you cannot answer this?

LegendofLink · #3 02-12-2007, 10:50 PM

sorry, c/pasted the wrong problem, hang on

MyTurn2Raise · #4 02-12-2007, 10:54 PM

sorry...I was too harsh

it's just you aren't going to pass if you cannot answer those questions

LegendofLink · #5 02-12-2007, 11:01 PM

no, hard to focus on anything while watching 24, that wasn't the problem, c/pasted the wrong one, hold on i'll pm you the one i had a question about.

NU Star · #6 02-12-2007, 11:13 PM

[ QUOTE ]
no, hard to focus on anything while watching 24, that wasn't the problem, c/pasted the wrong one, hold on i'll pm you the one i had a question about.

[/ QUOTE ]

You aren't going to post it? [img]/images/graemlins/frown.gif[/img]

tabako · #7 02-13-2007, 12:36 AM

Post it

Alexisonfyre · #8 02-13-2007, 12:41 AM

I can't believe that you post on a poker forum but can't answer these.

Alexisonfyre · #9 02-13-2007, 12:44 AM

A) Yes, since this situation is +EV. Edit: I saw you can answer by "Need more info", I guess you could write that since there are no given definitions of a risk-averse person.
B) +17.5
C) and D) I could answer but I don't wanna go back to microeconomy lol.

Dazarath · #10 02-13-2007, 07:43 AM

[ QUOTE ]
wtf are you doing playing poker if you cannot answer this?

[/ QUOTE ]

[ QUOTE ]
A) Would a risk-averse person accept a bet where he wins $550 with 10% probability, $175 with 30% probability and loses $150 with 60% probability?
B) What is the expected payoff of the above bet?
C) What is the expected utility of accepting the above bet if the initial wealth is $1050 and the utility function is U = W1/2?
D) Given the above utility function and initial wealth, would the person accept the bet?

[/ QUOTE ]

A) Need more info. There could be a risk adverse person who wouldn't pay $1 for a $10 flip. But there could also be a risk adverse person who won't flip for even odds, but will flip for $0.01 in EV.
B) 550 * 0.1 + 175 * 0.3 - 150 * 0.6 = 17.5
C) EU = (1050 + 550)/2 * 0.1 + (1050 + 175)/2 * 0.3 + (1050 - 150)/2 * 0.6 = 533.75
Expected gain in utility is 533.75 - 1050/2 = 8.75.
D) Yes.