- +1-530-264-8006
- info@tutorsglobe.com

18,76,764

Questions

Asked

21,311

Experts

9,67,568

Questions

Answered

Start Excelling in your courses, Ask an Expert and get answers for your homework and assignments!!

Submit Assignment2015 © Tutors Globe. All rights reserved.

## Choice under Uncertainty

Choice under Uncertainty:In the basic theory about choice under certainty the consumer is assumed to be able to compare and rank all possible consumption bundles. But is this meaningful if the consumer is not certain that she will ever be able to consume any particular bundle? Somehow we must also take into account that with uncertainty different bundles have different probabilities of actually being available for consumption. A way of incorporating uncertainty is to imagine (just for the sake of the argument) that the objects of choice are not consumption bundles, but “lottery tickets” whose prizes are bundles of consumption goods, or more commonly, money prizes. Different lotteries have different probabilities of winning the various possible prizes, and individuals are assumed to know these probabilities and make their choices based on their preferences for consumption and attitudes toward risk taking.

Assume that we have three “lotteries” whose prizes are three sums of money: Y

_{1}= $100, Y_{2}= $200, and Y_{3}= $500. If you won these prizes each time you played each lottery (and the cost of the lottery ticket is below $100) you would always prefer the third lottery, to the second, to the first, provided that you prefer more to less. But imagine that the probability of winning in the first lottery is 1/2 , while it is 1/4 in the second and only 1/10 in the third. Is it now obvious how you would choose among these three lotteries? (Assume that you are given the chance to participate in only one of these lotteries.)A particular type of utility function is used to make such comparisons, and it’s called the von Neumann − Morgenstern utility function, or the expected utility function. This function is actually a combination of a utility function under certainty and the probabilities of the different prizes. First we have to specify a utility function when we receive the prizes with certainty, which we write u(Y), and then we multiply these functions with the respective probability. Hence, in our case the expected utilities of the three lotteries, called L

_{1}, L_{2}and L_{3}, respectively,U (L_{1}) = (1/2) u (100) + (1/2) u (0),U (L

_{2}) = (1/4) u (200) + (3/4) u (0),U (L

_{3}) = (1/10) u (500) + (9/10) u (0).Obviously to know which lottery a particular consumer/player will choose we have to know the form of the “certainty” utility function u(Y).

Latest technology based Economics Online Tutoring AssistanceTutors, at the

www.tutorsglobe.com, take pledge to provide full satisfaction and assurance inIntermediate Microeconomics homework helpviaonline tutoring. Students are getting 100% satisfaction byonline tutorsacross the globe. Here you can get homework help for Intermediate Microeconomics, project ideas and tutorials. We provide email basedIntermediate Microeconomics homework help. You can join us to ask queries 24x7 with live, experienced and qualified online tutors specialized in Intermediate Microeconomics. ThroughOnline Tutoring, you would be able to complete your homework or assignments at your home. Tutors at theTutorsGlobeare committed to provide the best qualityonline tutoringassistance forEconomics homework helpandassignment helpservices. They use their experience, as they have solved thousands of the Computer assignments, which may help you to solve your complex issues of Intermediate Microeconomics.TutorsGlobeassure for the best quality compliance to your homework. Compromise with quality is not in our dictionary. If we feel that we are not able to provide thehomework helpas per the deadline or given instruction by the student, we refund the money of the student without any delay.