Chapter 15 Section Reviews

. The features of prospect theory include [___].

. Using Figure 15.2 as a starting point, suppose the gain is $400 (instead of $900) and the loss is $4 (instead of $64). The monetary value of the lottery is $[___] and the utility value of the lottery is [______] utils.

. Using Figure 15.2 as a starting point, suppose the gain is $400 (instead of $900) and the loss is $4 (instead of $64). The certainty equivalent of the lottery is c(L) = $[___].

. Use Widget 15.2. Suppose μ = 0.70 and λ = 1.50. The certainty equivalent of the lottery is c(L) = $[___].

. For an individual who experiences risk aversion, [___].

. Using Figure 15.3 as a starting point, suppose the gain is $400 (instead of $900) and the loss is $4 (instead of $64). The risk premium of the lottery is $[___].

. For an individual who experiences risk neutrality, [___].

. Using Figure 15.4 as a starting point, suppose the gain is $400 (instead of $900) and the loss is $4 (instead of $64). The certainty equivalent of the lottery is $[___] and the risk premium is [___].

. Comparative statics. The relationship between λ and risk aversion (as measured by the risk premium) is [___].

. Comparative statics. Suppose the gain in a lottery is large relative to the loss. The relationship between μ and risk aversion (as measured by the risk premium) is [___].

. Studies of the greater weight of loss (λ > 1).suggest that there is [___] variability in λ across individuals.

. Consider a gain lottery with a 50 percent chance of winning $60. Rudy's certainty equivalent is $15, and Newt's certainty equivalent is $30. Plausible values for the utility parameter μ are [___] for Rudy and [___] for Newt.

. Consider a gain lottery with a 50 percent chance of winning $60. Mid's certainty equivalent is $24. A plausible value for the utility parameter μ is [___].

. Consider a loss lottery with a 50 percent chance of losing $40. Rudy's certainty equivalent is –$10, and Newt's certainty equivalent is –$20. Plausible values for the utility parameter μ are [___] for Rudy and [___] for Newt.

. Use Widget 15.3. Suppose an individual is willing to pay $40 for a 50 percent chance of a $100 gain. The implied value of the utility parameter is μ = [___].

. Consider an experiment that used the bisection method to test for decreasing sensitivity. The low stimulus is 10 and the high stimulus is 40. We conclude that a subject has decreasing sensitivity if he or she chooses an intermediate stimulus [___].

. A recent study of decision-making by rats in uncertain environments reveals [___].

. Use Figure 15.6. The utility curve is steeper in the domain of loss, indicating [___].

. Use Figure 15.6. The utility curve in the domain of gain has a decreasing slope, indicating [___].

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