Question: 1. Johnathans utility for money is given by the exponential function: U(X)=4-4 (-x/1000) . Based on his utility function, what is his risk-odds for the

1. Johnathans utility for money is given by the exponential function: U(X)=4-4^(-x/1000).

Based on his utility function, what is his risk-odds for the $+/-1 deal, r($1)?
Is Johnathan a deltaperson? Explain.
Is he risk-neutral? Explain.
What is his risk-odds for the $+/-100 deal, r($100)?
What is his risk-aversion coefficient?

Suppose U(x)=x^0.5

Hint: See the Risk Graph notes posted in Moodle

Graph this utility function.

b. Suppose you have a binary lottery with a 40% chance of $25 and a 60% chance of $100. Draw the probability tree of this lottery.

c. Show the lottery in Part B on your graph from Part A. You need to show: U(25), U(100), EV, U(EV), EU, U(CE) and the CE. Be sure to label everything clearly. **If the TA cannot read your graph, you cannot get points**

d. What can you say about the CE and EV for this lottery? Why?

3. Suppose U(X)=15+X.

Hint: See the Risk Graph notes posted in Moodle

a. Graph this utility function

b. Suppose you have a binary lottery with a 40% chance of $0 and a 60% chance of $100. Draw the probability tree of this lottery.

c. Show the lottery in Part B on your graph from Part A. You need to show: U(0), U(100), EV, U(EV), EU, U(CE) and the CE. Be sure to label everything clearly. **If the TA cannot read your graph, you cannot get points**

d. What can you say about the CE and EV for this lottery? Why?

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