4. $1000 with of $325. (a) (b) Adam is risk averse. He is offered a choice between a gamble that pays a probability of 25% and $100 with a probability of 75%, or a sure payment What is the expected payment of the gamble? Will Adam prefer gamble over sure payment? Would he change his mind if the sure payment is $320 instead of $325? (c) If this individual has a utility function u(x) = lnx, would he prefer the payment of $320 or the gamble? (d) In the CRRA utility family u(x) = x¹7. If this individual has a 0.01, would he prefer the payment of $320 or the gamble? utility where y =
4. $1000 with of $325. (a) (b) Adam is risk averse. He is offered a choice between a gamble that pays a probability of 25% and $100 with a probability of 75%, or a sure payment What is the expected payment of the gamble? Will Adam prefer gamble over sure payment? Would he change his mind if the sure payment is $320 instead of $325? (c) If this individual has a utility function u(x) = lnx, would he prefer the payment of $320 or the gamble? (d) In the CRRA utility family u(x) = x¹7. If this individual has a 0.01, would he prefer the payment of $320 or the gamble? utility where y =
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:4.
$1000 with
of $325.
(a)
(b)
Adam is risk averse. He is offered a choice between a gamble that pays
a probability of 25% and $100 with a probability of 75%, or a sure payment
What is the expected payment of the gamble?
Will Adam prefer gamble over sure payment? Would he change his
mind if the sure payment is $320 instead of $325?
(c)
If this individual has a utility function u(x) = lnx, would he prefer
the payment of $320 or the gamble?
(d)
In the CRRA utility family u(x) = x¹-7. If this individual has a
utility where y = 0.01, would he prefer the payment of $320 or the gamble?
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Follow-up Question
In the CRRA utility family u(x) = x^(1−γ). If this individual has a
utility where γ = 0.01, would he prefer the payment of $320 or the gamble?
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