Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

(35 points) Priscila loves sunglasses. Her brother Mr. M found a website that sold Rayban glasses for only R$99 (Brazilian currency reais). He revealed the

image text in transcribed

image text in transcribed
(35 points) Priscila loves sunglasses. Her brother Mr. M found a website that sold Rayban glasses for only R$99 (Brazilian currency reais). He revealed the deal to Priscila and now she needs to decide on whether to buy the sunglasses 'om this suspicious source or not'. She has R$100 in her wallet. There is a probability of 50% that the sunglasses are not legit. If she buys them and she sees they are legit, she will need to spend an additional R$25 to adjust them, but they will have a value of $249 (in case she decides to sell them, so they will be part of her wealth). However, if she was victim of a scam, she will not need to adjust the sunglasses, but they will have a value of R$0 (she cannot sell them). Finally, assume that Priscila's has expected utility of the form: U(w ,wb) = Tim/Wb'l' (1 T[b)JLTg Where wg = wealth in the \"good\" state (no scam), wb= wealth in the \"bad\" state (scam), 11-3, = probability of being scammed. a) (10 points) Is she a risk neutral, riskaverse, or risk lover agent? What is her expected utility if she does not buy the sunglasses? b) (10 points} What is her expected utility if she takes the risk of buying the sunglasses? Will she buy them or not? c) (15 points) What is the range (interval) for the value of the probability of scam such that she is willing to purchase the suspicious product

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Accounting for Non-Accounting Students

Authors: John R. Dyson

8th Edition

273722972, 978-0273722977

Students also viewed these Economics questions