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Suppose that the consumer is asked to contemplate a gamble with a probability of 60% of winning Birr 10,000 with a utility of 10 utils, and a 40% probability of winning Birr 15,000 with a utility of 12 utils. A. What will be the expected income and expected utility of the consumer? B. If the utility of this consumer from a risk free alternative which gives him an income equal to the expected income of the risky alternative given above is equal to 11 utils, is this consumer risk lover or risk averse? Why? Illustrate your answer with the help of a diagram

Suppose that the consumer is asked to contemplate a gamble with a probability of 60% of winning Birr 10,000 with a utility of 10 utils, and a 40% probability of winning Birr 15,000 with a utility of 12 utils. A. What will be the expected income and expected utility of the consumer? B. If the utility of this consumer from a risk free alternative which gives him an income equal to the expected income of the risky alternative given above is equal to 11 utils, is this consumer risk lover or risk averse? Why? Illustrate your answer with the help of a diagram

Brief Principles of Macroeconomics (MindTap Course List)
Brief Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN:9781337091985
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter9: The Basic Tools Of Finance
Section: Chapter Questions
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Suppose that the consumer is asked to contemplate a gamble with a probability of 60% of

winning Birr 10,000 with a utility of 10 utils, and a 40% probability of winning Birr 15,000 with

a utility of 12 utils.

A. What will be the expected income and expected utility of the consumer?

B. If the utility of this consumer from a risk free alternative which gives him an income equal

to the expected income of the risky alternative given above is equal to 11 utils, is this

consumer risk lover or risk averse? Why? Illustrate your answer with the help of a diagram

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