Ahmad lives in a world with two goods A & B. He has three options: he can choose 14 units of A and 15 units of B; 2 unit

[answerhappygod]

Ahmad lives in a world with two goods A & B. He has three
options: he can choose 14 units of A and 15 units of B; 2 units of A and 45 units of B or no units of A and 50 units of B. How does Ahmad decide which bundle to choose ?
• Economists assume Ahmad chooses the bundle that makes him the happiest. But how do we measure whether one bundle makes
Ahmad happier than other?
• To represent the happiness a consumer derives from a bundle of
goods, economists use a concept called utility.
• Each bundle is given a number, or utility « score »., that represents
how happy that bundle makes the consumer. The goal of choosing the best bundle equates the goal of maximizing utility.
• The mapping of every potential bundle a consumer might enjoy to each bundle’s resulting utility is called the utility function.
1. Based on Chapter 6 (Consumer choice with uncertainty/certainty parts), answer the following question
A. Which option Ahmed will choose if
- In the first game, Ahmed has a 10% chance to get $100 and a 90% chance to get $0.
- In the second game he still has 50% to get either %10 or $0.
B. Interpret your result
2. How does utility theory help in decision analysis?
3. Why the prospect theory is important?
4. In your point of view, which is better prospect theory or expected utility theory? Why?