Jamal has a utility function U = W1/2, where W is his wealth in millions of dollars
Question:
Jamal has a utility function U = W1/2, where W is his wealth in millions of dollars (which determines how much he gets to buy and consume over his lifetime) and U is the utility he obtains.
a. Graph Jamal’s utility function. Is he risk averse? Explain.
b. In the final stage of a game show, the host offers Jamal a choice between (A) $4 million for sure, or (B) a gamble that pays $1 million with probability 0.6 and $9 million with probability 0.4. Should Jamal pick A or B? Explain you reasoning with appropriate calculations.
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a Yes Jamal is risk averse The marginal utility of an additional dollar ...View the full answer
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