2. Christiaan can go hiking, or he can stay at home. Hiking would be fun if nothing bad happens,but there is a risk if he goes hiking that he will meet a bear (not fun) or get bitten by a snake(very not fun). Christiaan decides that if there is a 5% chance of meeting a bear and a 1%chance of getting bitten by a snake, he would prefer to go hiking rather than stay at home.However, if the chance of meeting a bear is 10% and the chance of a snake bite is 5%,he definitely would rather stay at home.then(a) Consider the utility function: U (stay home) = 25, U (hike no event) = 100, U (hike & snake)-1000, U (hike & bear) = -200. Does this utility function represent Christiaan's pref-erences? Explain.(b) Suppose that the utility function in (a) does represent Christiaan's preferences. WouldChristiaan prefer to hike or stay home if the probability of meeting a bear is 6% and theprobability of being bitten by a snake is 4%? Show your work.

A rational economic agent's preferences are such that it assign higher utility to the alternative he…

2. Christiaan can go hiking, or he can stay at home. Hiking would be fun if nothing bad happens, but there is a risk if he goes hiking that he will meet a bear (not fun) or get bitten by a snake (very not fun). Christiaan decides that if there is a 5% chance of meeting a bear and a 1% chance of getting bitten by a snake, he would prefer to go hiking rather than stay at home. However, if the chance of meeting a bear is 10% and the chance of a snake bite is 5%, then he definitely would rather stay at home. (a) Consider the utility function: U (stay home) = 25, U (hike no event) = 100, U (hike & snake -1000, U (hike & bear) = -200. Does this utility function represent Christiaan's pref- erences? Explain. (b) Suppose that the utility function in (a) does represent Christiaan's preferences. Would

2. Christiaan can go hiking, or he can stay at home. Hiking would be fun if nothing bad happens, but there is a risk if he goes hiking that he will meet a bear (not fun) or get bitten by a snake (very not fun). Christiaan decides that if there is a 5% chance of meeting a bear and a 1% chance of getting bitten by a snake, he would prefer to go hiking rather than stay at home. However, if the chance of meeting a bear is 10% and the chance of a snake bite is 5%, then he definitely would rather stay at home. (a) Consider the utility function: U (stay home) = 25, U (hike no event) = 100, U (hike & snake -1000, U (hike & bear) = -200. Does this utility function represent Christiaan's pref- erences? Explain. (b) Suppose that the utility function in (a) does represent Christiaan's preferences. Would

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.3P

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