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?
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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