griseldaguerree
04.10.2021 •
Mathematics
Answer the following questions using the conventions of these problems as expressed in the notes for
the class and the text.
Say an individual is faced with the decision of whether to buy auto insurance or not (like before laws in
many states changed). The states of nature are that no accident occurs (with probability .992) or an
accident occurs (with probability .008).
Here is the payoff table for the decision maker
State of Nature
Decision
No Accident Accident
Purchase insurance -500
-500
Do not purchase Ins. 0
-10000
a-what is the expected monetary value of each decision and which is the best for the decision maker?
b-say the individual is a risk avoider. Create a table with plausible values of utility for the risk avoider,
calculate the expected utility of each decision and state which decision is best based on the expected
utility idea.
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