Economists define the ‘certainty equivalent’ of a risky stream of income as the amount of guaranteed money an individual would accept instead of taking a risk. The certainty equivalent varies between individuals based on their risk preference. Consider a risky bet that involves a 25% chance of losing $5,000 or a 75% winning $5,000 for an individual with starting income of $50,000. Calculate the certainty equivalent income that provides the same utility as this bet for individuals with these different utility functions: 1. U(I) = I
Economists define the ‘certainty equivalent’ of a risky stream of income as the amount of guaranteed money an individual would accept instead of taking a risk. The certainty equivalent varies between individuals based on their risk preference.
Consider a risky bet that involves a 25% chance of losing $5,000 or a 75% winning $5,000 for an individual with starting income of $50,000. Calculate the certainty equivalent income that provides the same utility as this bet for individuals with these different utility functions:
1. U(I) = I
2. U(I) = I–√
3. U(I) = ln(I)where ln represents the natural logarithm function
Type the numerical answers in the corresponding numbered boxes below. Round your answers to two decimal places. Do not use $ or , in your answers. (for example, enter 45223.45 or 46500.00)
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
