Question
You value your time at $50 an hour. If you choose to drive to your destination it will cost you $150 and the drive will
You value your time at $50 an hour. If you choose to drive to your destination it will cost you $150 and the
drive will take you 6 hours with probability 0.9 and 7 hour
s with probability 0.1
. In short,
you face a lottery
in which you will
spend $450 ($150 + cost of 6 hours) with probability 0.9 or
$500 ($150 + cost of 7 hours)
with probability 0.1
. If you fly, it will cost you $300 and your trip will last 2 hours with probability 0.7 and 4
hours with probability 0.3.
Here you face a lottery in which you will spend
$400 with probability 0.7 and
$500 with probability 0.3.
Assume that your total as
sets are
$50
0 and that
y
ou have
the following utility
for
the assets that remain after your spending
:
u($x) =
x
(the so called Bernoulli utility.)
Please note that the
utility function is defined on assets and not expenditures:
x
only makes sense when
0
x
while an
expenditure of, say, $100, formally is
-
100.
What should you do? Drive or fly?
Problem 5
(3p)
Tom
Step by Step Solution
There are 3 Steps involved in it
Step: 1
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-text-image.webp)
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Step: 3
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started