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You work for an economics consulting firm. The firm has a client that is interested in the behaviour of decision-maker X. Decision-maker X is facing some uncertainty. Write a report advising your client.
To do list:Do the initial analysis for your reportIdentify a particular decision maker affected by uncertainty.Write down a very simple decision problem representing X’s choice.What is X choosing?What are the possible outcomes?What are the probabilities of each outcome?What is X’s utility function?Solve X’s decision problem and thus explain what X chooses and why. What are the relevant implications?(If possible, do some research and use real numbers for e.g. the size of a potential economic loss. If not, just guess/estimate. It is often useful to analyse different scenarios with different numbers.)Do some further analysis for your reportAnalyse how X’s choice changes as relevant aspects change (i.e. do some comparative statics). Don’t do everything possible, just focus on a few aspects. For example, how does X’s choice (or other relevant outcomes) change if:An outcome changes?The probability of an outcome changes?Decision maker X has different risk preferences?Some other relevant aspect changes?Results can be arrived at in one of two waysNumerically: Consider different scenarios by changing the numbers (or another aspect of the problem), re-solving and comparing the outcomes.
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