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ECON 436

Homework 6

Due at 11:59 p.m. on Monday, March 20th

Please type your answers and submit a PDF to the dropbox on D2L under “Assignments” tab.

1.   Suppose you are choosing between two job offers after graduating. Offer A is a boring office job in Tucson that pays $35,000 a year. Offer B is your dream job and it pays $100,000, but you have to move to France.

a.   Which job offer would someone take if they employ the maximin criterion? Why?

b.   Which job would they take if they employ the maximax criterion? Why?

2.   Think of a situation where you might have made a decision using the minimax-risk criterion. Explain this scenario and why you decided to use minimax-risk criterion in this situation.

3.   You are presented with the following gamble: you have a 25% chance of receiving $7, a 25% chance of receiving $10, and a 50% chance of receiving $3 .

Calculate the certainty equivalent for this gamble if you have the following utility function is u(x) =  4√x

4.   Consider the gamble from question 3. You can either take the gamble or have $5 with 100% probability. Your value function is as follows:

v(x) = {  √x,         x ≥ 0

a.   Which option would you pick if your reference point is having $0?

b.   Which option would you pick if your reference point is having $5?

5.   Explain how framing a gamble in the “gains” domain would likely cause someone to behave differently than if you frame it as a “loss .”

6.   Explain why someone might choose to make a single car payment of $300 every month instead of paying for taxi rides every day (Assume the total cost of the taxi rides per month would be less than or equal to $300).