Question: Clear solutions please Paragraph Styles Problem 1: Expected Utility Theory (26 points) Joe has a wealth of 16 and is an expected utility maximizer. He

Clear solutions please

Paragraph Styles Problem 1: Expected Utility Theory (26 points) Joe has a wealth of 16 and is an expected utility maximizer. He is offered to participate in a lottery L that gives him 80 ( or 0 E with equal probability or to receive a sure amount of S=15 6 instead. 50% 80 E So 100% 15 E 50% Joe assigns a risk premium RP=+16 6 to the lottery L. a) Does this risk premium points towards Joe being a risk prone, risk neutral, or risk averse decision maker? (2 point) b) Conclude from the information about RP whether Joe will prefer the lottery L or the sure amount S. (6 points) c) Demonstrate that Joe's risk premium for lottery L is in line with a utility function u(x)= Vx =x0.5 (10 points) d) Now assume Joe is more risk averse than previously assumed. Would this result in a higher or lower certainty equivalent for lottery L than before? (2 point) O 9

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