Question

“Subjects were given the opportunity to bet on one of two events. Three types of events were used: (i) simple events, such as drawing a red marble from a bag containing 50 percent red marbles and 50 percent white marbles; (ii) conjunctive events, such as drawing a red marble seven times in succession, with replacement, from a bag containing 90 percent red marbles and 10 percent white marbles; and (iii) disjunctive events, such as drawing a red marble at least once in seven successive tries, with replacement, from a bag containing 10 percent red marbles and 90 percent white marbles. In this problem, a significant majority of subjects preferred to bet on the conjunctive event rather than on the simple event. Subject also preferred to bet on the simple event rather than on the disjunctive event.”

Required: Show (using mathematics) that the result conflicts with the expected utility theory. What is this phenomenon called? What mechanisms and explanations have been proposed for it in the literature? How does it affect decision making under uncertainty? What aspects of individual behaviour, other than decision making under uncertainty, does this phenomenon affect? Have there been any suggestions in the literature to ameliorate or eliminate it? Discuss.

Answer 1

1.The results of the events has a conflict with the expert utility theory and it has various levels of output of products and services and there are 100 percent marbles in which 90 percent are productive and 10 percent are not productive.Utility is a term in economics that refers to the total satisfaction received from consuming a good or service. Economic theories based on rational choice usually assume that consumers will strive to maximize their utility. The economic utility of a good or service is important to understand, because it directly influences the demand, and therefore price, of that good or service. In practice, a consumer's utility is impossible to measure and quantify. However, some economists believe that they can indirectly estimate what is the utility for an economic good or service by employing various models.

arly economists of the Spanish Scholastic tradition of the 1300s and 1400s described the economic value of goods as deriving directly from this property of usefulness and based their theories of prices and monetary exchanges. This conception of utility was not quantified, but a qualitative property of an economic good. Later economists, particularly those of the Austrian School, developed this idea into an ordinal theory of utility, or the idea that individuals could order or rank the usefulness of various discrete units of economic goods

If utility in economics is cardinal and measurable, the total utility (TU) is defined as the sum of the satisfaction that a person can receive from the consumption of all units of a specific product or service.If utility in economics is cardinal and measurable, the total utility (TU) is defined as the sum of the satisfaction that a person can receive from the consumption of all units of a specific product or service.