Draw a utility curve and state the important features of decision ...

[frankwu]

Draw a utility curve and state the important features of decision making represented by the curve.
 
  What will be an ideal response?

Question 2

Use the Allais paradox to explain the behavior of contestants on game shows such as Deal or No Deal.
 
  What will be an ideal response?

[Koolkid240]

Answer to Question 1

Answer: Students should reproduce Figure 9-4. The important features of decision making represented by the curve include (1) there is a minimal marginal utility effect represented by the flattening of the curve, and (2) loss aversion is represented in the curve by the steeper slope of the loss compared to the gains portion of the curve.

Answer to Question 2

Answer: The Allais paradox emphasizes the role of anticipated regret in decision making. In Deal or No Deal, contestants eliminate cases from a field to identify the case with the million- dollar prize. They eliminate a certain number of cases per round. At the end of each round, a banker makes them an offer. They must choose between taking the offer or continue playing the game in hopes of winning one million dollars. In the early rounds, the banker makes low offers. Contestants always continue because they think they will win more money if they do so. Accepting a low offer at that point would be devastating. However, as contestants progress, the banker's offers increase. Based on probabilities, these later offers are often greater than what the contestants are likely to win yet they continue to play. In these later rounds, especially after the 1,000,000 has been eliminated, contestants continue because the consequences feel about the same so they opt for the higher expected value.

[frankwu]

Excellent

[nyrave]

Thanks for the timely response, appreciate it