PROBLEM (10) A risk averse decision maker with u(x) equal (1/2) probabilities. (a) Would he choose the lottery or a sure reward of $901 ? (b) Now suppose that he can buy "2 copies" of the lottery; this means there are 2 lotteries like above where the random prizes for each lottery is drawn independently with the probabilities above, and the sum reward from two lotteries is to be paid to the decision maker. Would the agent choose this "bundled lottery" or a sure reward of 2 x $901 = $1802? As you see, when the risk is independently replicated, the agent is less risk averse against aggregate risk that is composed of many "idiosyncratic risks". = √x faces a lottery L that delivers $2500 or $100 with

PROBLEM (10) A risk averse decision maker with u(x) equal (1/2) probabilities. (a) Would he choose the lottery or a sure reward of $901 ? (b) Now suppose that he can buy "2 copies" of the lottery; this means there are 2 lotteries like above where the random prizes for each lottery is drawn independently with the probabilities above, and the sum reward from two lotteries is to be paid to the decision maker. Would the agent choose this "bundled lottery" or a sure reward of 2 x $901 = $1802? As you see, when the risk is independently replicated, the agent is less risk averse against aggregate risk that is composed of many "idiosyncratic risks". = √x faces a lottery L that delivers $2500 or $100 with

Calculus For The Life Sciences

2nd Edition

ISBN:9780321964038

Author:GREENWELL, Raymond N., RITCHEY, Nathan P., Lial, Margaret L.

Publisher:GREENWELL, Raymond N., RITCHEY, Nathan P., Lial, Margaret L.

Chapter12: Probability

Section12.4: Discrete Random Variables; Applications To Decision Making

Problem 18E

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