ECO - Expected Value Calculation

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1) Growing up, family vacations were difficult for your instructor because both she and her father have a disease called FHS muscular dystrophy that causes inability to walk, severe pain, and other problems. It's about as "fun" as it sounds! Let's consider a family in the same situation that is considering taking a 10-day vacation, the only one possible in ten years due to their busy schedules. 

There are two mutually exclusive possibilities:
Someone will get sick and ruin the whole vacation (no vacation days), or
No one will get sick and they will get ten whole days of vacation.

We can write the family’s utility function as U = V1/2 (or U = V^(1/2) if it does not show correctly on your monitor), where V is the number of vacation days the family ends up being able to take. The chance of someone in the family getting sick over the relevant time period is 20%. What is the expected value of V over the vacation?

2)Continuing with the scenario just described, calculate the family’s expected utility (expected value of U). 

    • 7 years ago
    ECO - Expected Value Calculation

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