PSY 333 — Assignment 8

To answer the questions, please copy and paste them into Word (or some other text editor) and type out your answers. Then please upload your document to the Assignment dropbox on D2L by the due date.

Due date: Next Tuesday by midnight. If your assignment is late let us know and we can work something out.

Expected Value and Expected Utility

Note: There are several ways you could do the drawings for this assignment. If both Powerpoint and Word have drawing functions, although these can be a bit clumsy. Or if you’re a coder you could make some code to draw the curves. Finally, if all else fails just draw it on paper, take a photo of it and paste it into your Word document.

1. Draw a concave utility curve. Are people with this shape of utility curve risk averse or risk seeking? (3 points).

2. Draw a convex utility curve. Are people with this shape of utility curve risk averse or risk seeking? (3 points)

The remaining questions are based on this decision:

• Option A: $100 for sure
• Option B: $200 with 50% probability, $0 with 50% probability

3. What is the expected value of option A? (1 point)

4. What is the expected value of option B? (1 points)

5. Pick you “favorite” utility curve (i.e. concave or convex). Show graphically that this utility curve is either risk seeking or risk averse. (2 points)