Suppose that Lizzo's utility function U is given by U = wD.53 where w is wealth. Lizzo has wealth of £21,500 but faces a probability of getting ill and being left with only £11,180. She has an 0.8 probability of being well and a 0.2 probability of being il.

Suppose that Lizzo's utility function U is given by U = wD.53 where w is wealth. Lizzo has wealth of £21,500 but faces a probability of getting ill and being left with only £11,180. She has an 0.8 probability of being well and a 0.2 probability of being il.

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

d) Lizzo is risk-averse.
O True
O False
e) To within two decimal places (e.g. 0.09), Lizzo's certainty equivalent is 7
f) To within two decimal places, Lizzo's risk premium is

Suppose that Lizzo's utility function U is given by U = w.53, where w is wealth. Lizzo has wealth of £21,500 but faces a probability of
getting ill and being left with only £11,180. She has an 0.8 probability of being well and a 0.2 probability of being ill.

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