3. Suppose the individual has a utility function In(c) where c is consumption and In(-)is the natural logarithm function (that is, logarithm with base e; which is a verypopular utility function used in both economics and finance research). Calculatethe expected utility from each lottery.4. Variance is frequently used measure of dispersion for the probability distribution ofa random variable. Furthermore, variance is often seen as a measure of risk. Whatdo you think this example is trying to show you? Consider two lotteries. Lottery A is such that an individual receives a prize of 1 unitof a consumption good with 80% probability and 100 units of the consumption good with20% probability. Lottery B presents the winner with a prize of 10 units of a consumptiongood with 99% probability and a prize of 1090 units of the consumption good with 1%probability.

Expected Utility: It is the weighted average of all possible outcomes under various circumstances.…

3. Suppose the individual has a utility function In(c) where c is consumption and In(-) is the natural logarithm function (that is, logarithm with base e; which is a very popular utility function used in both economics and finance research). Calculate the expected utility from each lottery.

3. Suppose the individual has a utility function In(c) where c is consumption and In(-) is the natural logarithm function (that is, logarithm with base e; which is a very popular utility function used in both economics and finance research). Calculate the expected utility from each lottery.

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

3. Suppose the individual has a utility function In(c) where c is consumption and In(-)
is the natural logarithm function (that is, logarithm with base e; which is a very
popular utility function used in both economics and finance research). Calculate
the expected utility from each lottery.
4. Variance is frequently used measure of dispersion for the probability distribution of
a random variable. Furthermore, variance is often seen as a measure of risk. What
do you think this example is trying to show you?

Consider two lotteries. Lottery A is such that an individual receives a prize of 1 unit
of a consumption good with 80% probability and 100 units of the consumption good with
20% probability. Lottery B presents the winner with a prize of 10 units of a consumption
good with 99% probability and a prize of 1090 units of the consumption good with 1%
probability.

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