Question

Louisa and Elizabeth each have total household wealth of $100,000. Suppose their sister, Willa, has asked them to invest in her new doll-making business. If the business is successful, each will “win” $60,000. If the business fails, each will lose $20,000. Louisa is only slightly risk averse while Elizabeth is very risk averse. (6 points)

a. Draw each girl’s utility curve.

b. Indicate how the increase of $60,000 and decrease of $20,000 affects each girl’s utility differently.

Answer 1