Problem 3. Carol's risk preference is represented by the following expected utility formula: U(T, C₁; 1 T, C₂) = π√√₁ + (1 - π) √√C₂. i) Suppose Carol is indifferent between the following two options: the first option A returns $100 with probability and $X with probability, and the second option B returns $49 for sure. Determine X. ii) Consider the following three lotteries: L₁ = (0.9, $100; 0.1, $49), L2 = (0.7, $225; 0.3, $49), and L3 = (0.5, $400; 0.5, $0). What is the ranking of these lotteries for Carol? Calculate the risk premiums of these lotteries for Carol.

Problem 3. Carol's risk preference is represented by the following expected utility formula: U(T, C₁; 1 T, C₂) = π√√₁ + (1 - π) √√C₂. i) Suppose Carol is indifferent between the following two options: the first option A returns $100 with probability and $X with probability, and the second option B returns $49 for sure. Determine X. ii) Consider the following three lotteries: L₁ = (0.9, $100; 0.1, $49), L2 = (0.7, $225; 0.3, $49), and L3 = (0.5, $400; 0.5, $0). What is the ranking of these lotteries for Carol? Calculate the risk premiums of these lotteries for Carol.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.8P

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