2. Let the utility of money function be u(w) = w'. Consider the lottery which yields w = $10,000 with .8 probability of winning w $3,000 and .2 probability of losing $5,000. Calculate: a. the expected utility of this lottery. b. the utility of the expected value of this lottery. c. the certainty equivalent (the amount of money which yields utility equal to the expected utility) of this lottery. d. the coefficient of absolute risk aversion for this utility function at w $10,000. %3D

2. Let the utility of money function be u(w) = w'. Consider the lottery which yields w = $10,000 with .8 probability of winning w $3,000 and .2 probability of losing $5,000. Calculate: a. the expected utility of this lottery. b. the utility of the expected value of this lottery. c. the certainty equivalent (the amount of money which yields utility equal to the expected utility) of this lottery. d. the coefficient of absolute risk aversion for this utility function at w $10,000. %3D

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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