Question: An investor has initial wealth w = 2, and a utility function U(w) = 1 exp(Aw). A lottery has a payoff of 1 with probability

  1. An investor has initial wealth w = 2, and a utility function U(w) = 1 exp(Aw). A lottery has a payoff of 1 with probability p and a payoff of -1 with probability (1 p).

    1. (a) Suppose A = 1 and p = 0.85. Should the investor enter into the lottery?

    2. (b) Suppose A = 1. Solve for the value of p such that the investor is indifferent between

      entering and not entering the lottery.

    3. (c) Suppose A = 2 and p = 0.85. Should the investor enter into the lottery?

    4. (d) Suppose A = 2. Solve for the value of p such that the investor is indifferent between entering and not entering the lottery.

Please write the answer out on paper

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