Utility functions incorporate a decision maker’s attitude towards risk. Let’s assume that the following utilities were assessed for Danica Wary.xu(x)-$2,0000-$50062$075$40080$5,000100 Would a risk neutral decision maker be willing to take the following deal: 30% chance of winning $5,000, 40% chance of winning $400 and a 30% chance of losing $2,000? Using the utilities given in the table above, determine whether Danica would be willing to take the deal described in part a?Is Danica risk averse or is she a risk taker? What is her risk premium for this deal?

Utility Function:A utility function is a tool that represents a person's preferences for different…

Answered: Utility functions incorporate a…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Utility functions incorporate a decision maker’s attitude towards risk. Let’s assume that the following utilities were assessed for Danica Wary.

x	u(x)
-$2,000	0
-$500	62
$0	75
$400	80
$5,000	100

Would a risk neutral decision maker be willing to take the following deal: 30% chance of winning $5,000, 40% chance of winning $400 and a 30% chance of losing $2,000?
Using the utilities given in the table above, determine whether Danica would be willing to take the deal described in part a?
Is Danica risk averse or is she a risk taker? What is her risk premium for this deal?

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