Problem 3. Carol's risk preference is represented by the following expected utility formula: U(T, C₁; 1 T, C₂) = π√√₁ + (1 - π) √√C₂. i) Suppose Carol is indifferent between the following two options: the first option A returns $100 with probability and $X with probability, and the second option B returns $49 for sure. Determine X. ii) Consider the following three lotteries: L₁ = (0.9, $100; 0.1, $49), L2 = (0.7, $225; 0.3, $49), and L3 = (0.5, $400; 0.5, $0). What is the ranking of these lotteries for Carol? Calculate the risk premiums of these lotteries for Carol.

Problem 3. Carol's risk preference is represented by the following expected utility formula: U(T, C₁; 1 T, C₂) = π√√₁ + (1 - π) √√C₂. i) Suppose Carol is indifferent between the following two options: the first option A returns $100 with probability and $X with probability, and the second option B returns $49 for sure. Determine X. ii) Consider the following three lotteries: L₁ = (0.9, $100; 0.1, $49), L2 = (0.7, $225; 0.3, $49), and L3 = (0.5, $400; 0.5, $0). What is the ranking of these lotteries for Carol? Calculate the risk premiums of these lotteries for Carol.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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