ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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Farmers Jack and Joe have learned that their respective farms have been struck by an unusual virus.

When Joe goes to the vet, he is told that if nothing is done 200 of his 800 animals will live. The alternative is an experimental drug, if used there is a 25% chance that all animals will live and a 75% chance that none will live.

When Jack goes to the vet, he is told that if nothing is done 600 of his 800 animals will die. His vet also offers an experimental drug and explains that if used there is a 75% chance that all the animals will die and a 25% chance that none will die.

Using the value function from Prospect Theory predict which action Joe and Jack will take.

a) Both Joe and Jack will do nothing

b) Both Joe and Jack opt for the experimental drug

c) Joe will do nothing but Jack will opt for the experimental drug

d) Joe will opt for the experimental drug but Jack will do nothing.

Explain (please also explain how your prediction differs from the prediction of standard expected utility theory) :

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