Assume that Lleuwen has zero initial wealth, prefers more money to less and her preferences satisfy the
Question:
Assume that Lleuwen has zero initial wealth, prefers more money to less and her preferences satisfy the axioms of Expected Utilty Theory (EUT). She is given a lottery ticket which pays out £1,000 with a probability of 30%, and pays nothing otherwise. Her certainty equivalent to this lottery ticket is £250.
i. Graph her full set of indifference curves in a Machina triangle with £0, £250 and £1,000 as the pure outcomes. Account for the shape of her indifference curves.
[20%]
[5%]
Which of the following two lotteries would Lleuwen prefer?
L1= [$0 pr=0.2, $250 pr=0.3, $1000 pr=0.5]
L2=[$0 pr=0.3, $250 pr=0.1, $1000 pr=0.6]
We are now told that Lleuwen is also indifferent between the certainty of £750 and a lottery ticket which gives an 80% chance of winning £1,000.
iii, Derive and graph Lleuwen's normalised von-Neumann Morgenstern utility function for values between £0 and £1,000.
IV. Describe Lleuwen's attitude to risk
South Western Federal Taxation 2017 Comprehensive
ISBN: 9781305874169
40th Edition
Authors: William H. Hoffman, David M. Maloney, William A. Raabe, James C. Young