Question

Note that there are no correct answers per sec.

Each student is asked to respond based on his or her subjective evaluation. No calculations are required.

Each problem has individual, team, and class components.

Problem 1: Preferences You are given a choice between being awarded $1000 this time next year (with complete certainty), or a reduced amount of dollars today. How much would you be willing to settle for, in order to receive the award today?

Problem 2 Hypertension and the standard gamble Assume you suffer from severe hypertension that has led to blurry vision. If you continue to be treated with standard hypertension medications, you can expect to live another 25 years, but your vision problems will persist and become permanent. However, a new drug has come to the market, which can restore your vision to a nearly normal, with the same life expectancy of 25 years. However, the drug carries one critical side effect –it leads to immediate death. Taking the new drug is your personal choice. Would you agree to take this drug (which will cure your vision with certainty) if the chance of immediate death is given by one of the following probabilities:

A. 10% --- B. 25% --- C. 50% --- D. 75% --- E. 90%. ---

Answer 1

Problem 1: If I desire to receive the award today only, then I will be ready to settle for a decent amount. This amount, I can invest and make 1000$ or maybe more until the same time in the next year. Suppose they agree to reward me with 900$ today amd I invest the money for a return of 15% per annum. Then at the same time in the next year, I will make 1035$, making a profit of 35$

Problem 2: Certainly, I would like to take a drug if it is restoring my vision along with same life expectancy because it is important that a person lives his or her life to its fullest. However, the probability of immediate death has to be kept in mind. For lower probabilities of immediate death, I will certainly go for the drug. Hence when the probability is 10%, 20% and 50%, I would like to take the risk.

But when the probability goes as high as 75% and 90%, I will stay away from the new drug and continue with standard medication.