Consider an individual with a quadratic utility function (U(W) = 8*W) and wealth of 10 euros....

Transcribed Image Text:

Consider an individual with a quadratic utility function (U(W) = 8*W²) and wealth of 10 euros. This individual is playing a complex game G, where with 40% chance her wealth decreases to 4 euros, 20% chance it stays the same at 10 euro, and 40% chance the wealth increases to 30 euros. a) Calculate expected utility of wealth from this game G. b) c) d) e) Calculate the utility of obtaining the expected value from "safe in hand" outcome. Is individual risk averse? Calculate the certainty equivalence of wealth value for W. What is the risk premium that this individual requires? Consider an individual with a quadratic utility function (U(W) = 8*W²) and wealth of 10 euros. This individual is playing a complex game G, where with 40% chance her wealth decreases to 4 euros, 20% chance it stays the same at 10 euro, and 40% chance the wealth increases to 30 euros. a) Calculate expected utility of wealth from this game G. b) c) d) e) Calculate the utility of obtaining the expected value from "safe in hand" outcome. Is individual risk averse? Calculate the certainty equivalence of wealth value for W. What is the risk premium that this individual requires?

Answer rating: 100% (QA)

a The expected value of wealth from game G is EW 04 x 4 02 x 10 04 x 30 14 The expected utility of w... View the full answer