Given u(x) = x0.5 and Lottery A (below) Lottery A Probability 0.50 |0.25 0.25 Outcome |64 16 For automatic grading, give all numerical answers to exactly two decimal places. Do not include currency signs 1) What is the expected value? (Give the answer as 36.00, not 36) 2) What is the expected utility? 3) What is the certainty equivalent? (Number only)

Given u(x) = x0.5 and Lottery A (below) Lottery A Probability 0.50 |0.25 0.25 Outcome |64 16 For automatic grading, give all numerical answers to exactly two decimal places. Do not include currency signs 1) What is the expected value? (Give the answer as 36.00, not 36) 2) What is the expected utility? 3) What is the certainty equivalent? (Number only)

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

(Note: calculating the certainty equivalent of the lottery would be a little different than we've
done in class. Squaring your EU result would give the equivalent wealth, which you would use
to calculate the certainty equivalent of the lottery w/payment.)
7) If starting wealth is 100 and the price of playing Lottery A is 15, would this person play
Lottery A (Y or N)?
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Blank # 7

Given
u(г) — 20.5
= p0.5
and Lottery A (below)
Lottery A
Probability
|0.50
|0.25
0.25
Outcome
64
16
For automatic grading, give all numerical answers to exactly two decimal places. Do not
include currency signs
1) What is the expected value? (Give the answer as 36.00, not 36)
2) What is the expected utility?
3) What is the certainty equivalent? (Number only)
4) What is the risk premium?
5) Would this person rather receive 20 for sure than play Lottery A? (Answer should be Y or N
for auto-grading to work)
6) (Harder) In many applications of expected utility, it is possible to lose money. The usual way
of handling this is to interpret utility in terms of final wealth.
Suppose it costs money to play this lottery. If starting wealth is 100, calculate the expected
utility of playing lottery A if the price of playing is 15. Your answer should be to two decimal
places.

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