Behavioral Economics: Study Material with Solved Assignments

BEHAVIORAL ECONOMICS 1
BEHAVIORAL ECONOMICS
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BEHAVIORAL ECONOMICS 2
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Problems Answers
Number 1
a. Lucy’s current wealth is $ 100 000; the chances of getting off and not paying and the
chances of paying the fine plus the court cost are both 50%
Utilities associated with the probabilities are:
The utility of getting off and not paying the fine considering the 0.5 probability is 100.

BEHAVIORAL ECONOMICS 3
The utility of paying the fine considering the 0.5 probability is 50.
This contributes to a function 2y + x = 0, the graph drawn represents wealth in the y-axis
and fine in the x-axis.
b. Lucy cannot be an expected utility maximize in this case. She is risk averse, she chooses
to remain with her wealth rather than gamble and also chooses to pay the fine rather than
go to court.
c. By the use of the prospect theory, losses and gains are evaluated considering the both
cases; going to court and winning and going to court and losing. The valuation reference
point is the current wealth of Lucy which is $100000. It is plotted on the y-axis against
the gains and losses in the x-axis.