Question

Suppose U(X)=15+X. a. Graph this utility function b. Suppose you have a binary lottery with a...

Suppose U(X)=15+X.

a. Graph this utility function
b. Suppose you have a binary lottery with a 40% chance of $0 and a 60% chance of $100. Draw
the probability tree of this lottery.
c. Show the lottery in Part B on your graph from Part A. You need to show: U(0), U(100), EV,
U(EV), EU, U(CE) and the CE. Be sure to label everything clearly.
d. What can you say about the CE and EV for this lottery? Why?

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Homework Answers

Answer #1

a.

X U(X)
0 15
25 40
50 65
75 90
100 115
125 140

d.

As CE and EV are equal then the individual is risk neutral and there is no risk premium.

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