Questions tagged [utility]

For all questions involving utility functions as used in economics and decision theory, including study of their properties or how they can be used to represent preferences.

A utility function is a numerical representation of an agent’s preferences. If $\succeq$ is a preference relation on a set of alternatives $X$, then the function $u: X\to\mathbb{R}$ is a utility representation of $\succeq$ if $x\succeq y$ holds if and only if $u(x)\ge u(y)$. In many cases, one might want the representation to be of a special form. For example, if $X$ is the set of probability distributions on a finite set $F=\{y_1,\ldots,y_n\}$ so that $x=(p_1,\ldots,p_n)$, then an expected utility representation of $\succeq$ is of the form $$u(x)=\sum_{i=1}^n p_iv(y_i)$$ for some function $v:F\to\mathbb{R}$.

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Expected utility theory, risk aversion, mean preserving spread

(See also short version below). Consider two lotteries $A$ and $B$ \begin{align} L_A&= ( (1/2),w_0-h;\ (1/2),w_0+h )\\ L_B&= ( (1/2),w_0-2h;\ (1/2),w_0+2h ) \end{align} where $0
Alessandro
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Insurance Premium that covers only the loss and not the profit

For example: The utility function is ln(W), where W refers to the Wealth level. The initial wealth is $10,000 $ and you have a equal chance of winning and losing $1000. What if the insurance policy only covers the loss, how are you willing to pay…
lakshmen
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How to find the marshallian demand of utility function $n$ goods (logit) beforehand?

I have a utility function (logit) that is kinda weird and hard to work with given the constraints mentioned in the problem. I’m trying to derive the marshallian demand for $x_0$, but I'm not sure how to. Thought of doing a transformation such that…
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Calculate premium for claim, the principle of zero utility

$$\begin{array}{|c|c|c|c|c|} \hline X&0&200&400&800&1000&2000\\ \hline \mathbb{P}&0.4&0.2&0.1&0.1&0.1&0.1\\ \hline \end{array}$$ The principle of zero utility formula: \begin{equation} \mathbb{E}u(x+\pi(X)-X)=u(w). \end{equation} I am given…
Karagum
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Power Utility Function Inverse

If power utility is $p = \frac{x^{1- \gamma} -1}{1 - \gamma}$ then is the inverse of the power utility function just $\frac{1 - \gamma}{p^{1- \gamma} -1}$?
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Expectation of a Utility Function

I'm trying to understand how to calculate the expectation of a utility function, but not sure if I'm understanding it correctly... If your given a utility function $U(w)$ is $E[U(w)] = U(w)$?
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Utility function square root

Could somebody tell my how to calculate $EU(X+2)$, where $U(X)={\sqrt X}$ and X is distributed evenly over the interval $[a,b]$?