I need help solving problem 7 sections a-d. Please note that this is not graded work. I obtained this question from an old text book to help me practice problem sets. Do let me know if you have additional questions. В7. Risk aversion. Suppose that you took part in a lottery that had a chance to increase, decrease, orhave no effect on your level of income. With probability 0.5, your income remains at its originallevel, $500. With probability 0.2, your income increases to $700, and with probability 0.3, yourincome decreases to $400. Your utility function isu(I) = 10.7,where I denotes your income level.(a) Using only the utility function, show that your risk preferences are risk averse.(b) Calculate both your EU and the utility equivalent of the EV of your income.(c) Using the results from part (b), show that your risk preferences are risk averse.(d) Suppose now that you had the option to either accept this lottery, or walk away with your initial$500. Should you accept the lottery? Why or why not?

Given information Utility function U=I^0.7 Probability of original income $500=0.5 Probability of an…

7. Risk aversion. Suppose that you took part in a lottery that had a chance to increase, decrease, or have no effect on your level of income. With probability 0.5, your income remains at its original level, $500. With probability 0.2, your income increases to $700, and with probability 0.3, your

7. Risk aversion. Suppose that you took part in a lottery that had a chance to increase, decrease, or have no effect on your level of income. With probability 0.5, your income remains at its original level, $500. With probability 0.2, your income increases to $700, and with probability 0.3, your

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

I need help solving problem 7 sections a-d.

Please note that this is not graded work. I obtained this question from an old text book to help me practice problem sets. Do let me know if you have additional questions.

В
7. Risk aversion. Suppose that you took part in a lottery that had a chance to increase, decrease, or
have no effect on your level of income. With probability 0.5, your income remains at its original
level, $500. With probability 0.2, your income increases to $700, and with probability 0.3, your
income decreases to $400. Your utility function is
u(I) = 10.7,
where I denotes your income level.
(a) Using only the utility function, show that your risk preferences are risk averse.
(b) Calculate both your EU and the utility equivalent of the EV of your income.
(c) Using the results from part (b), show that your risk preferences are risk averse.
(d) Suppose now that you had the option to either accept this lottery, or walk away with your initial
$500. Should you accept the lottery? Why or why not?

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