Consider a person with the following utility function over wealth: u(w) = ew, where e is the exponential function (approximately equal to 2.7183) and w = wealth in hundreds of thousands of dollars. Suppose that this person has a 40% chance of wealth of $50,000 and a 60% chance of wealth of $1,000,000 as summarized by P(0.40, $50,000, $1,000,000).
a. What is the expected value of wealth?
b. Construct a graph of this utility function.
c. Is this person risk adverse, risk neutral, or a risk seeker?
d. What is this person's certainty equivalent for the prospect?