Question
1. Calculate the certainty equivalent for each of the lotteries in question 1, assuming u(x)=√x a....
1. Calculate the certainty equivalent for each of the lotteries in question 1, assuming u(x)=√x
a. 20% chance of $100, 80% chance of $0 b. 60% chance of $500, 30% chance of $100, 10% chance of $50
Homework Answers
Answer #1
a) Let the certainty equivalent be K. Then, it is computed by equivalence theorem here as:
Therefore 4 is the certainty equivalent here.
b) Let the certainty equivalent be K. Then, it is computed by equivalence theorem here as:
Therefore 293.2148 is the certainty equivalent here.
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