Question: 2. Penny has the utility function U (I ) = x/i where I is the level of income. Penny's income is 16 with probability 1

2. Penny has the utility function U (I ) = x/i where I is the level of income. Penny's income is 16 with probability 1 f 2 and 36 with probability 1/2. (a) Is Penny risk averse or risk loving? (b) What is Penny's expected utility? (c) What is the certainty equivalent for the lottery above? [Hint: what is the xed amount of money that generates the same expected utility as in part (b)?] (d) If Penny were to buy insurance, then her income after paying the insurance premium would be 22 with probability 1 / 2 and 26 with probability 1 / 2. Would Penny choose to purchase insurance

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