Given u(x)=x^0.5 and Lottery A (below) Lottery A Probability 0.50 0.25 0.25 Outcome 64 16 0 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
and Lottery A (below)
Lottery A
| Probability | 0.50 | 0.25 | 0.25 |
| Outcome | 64 | 16 | 0 |
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.
(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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