Problem
Imagine that you are a subject in one of Maurice Allais lab experiments involving the same four gambles as in the chapter. Gamble A provides a 89% chance of winning $1,000, a 10% chance of winning $5,000, and a 1% chance of winning nothing. Gamble B provides a 100% chance of winning $1,000. Gamble C provides an 11% chance of winning $1,000 and an 89% chance of winning nothing. Finally, gamble D provides a 10% chance of winning $5,000 and a 90% chance of winning nothing. Your utility function over money is UðxÞ = px.
a. Compute your expected utility from each of the four gambles.
b. In the first scenario, you are given a choice between gambles A and B. Which would you choose given your utility function?
c. In the second scenario, you are given a choice between gambles C and D. Which would you choose given your utility function?
d. Compare your choices in the two scenarios, and compare them to the actual experimental results reported in the text.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.