Consider a decision maker whose preferences over lotteries satisfy the von Neumann- Morgenstern axioms and whose Bernoulli utility function is given by with x>-a/b where a; b 2 R are constants. (a) Compute the Arrow-Pratt measures of absolute and relative risk aversion for the particular Bernoulli utility function given above.

(b) Assume that a = 1 and b = 1=2. If the decision maker has wealth x = 13 and is exposed to a gamble that yields +3 with probability 1=2 and 3 with probability 1=2, what is the expected utility of this decision maker when she is exposed to the gamble? (c) How much would the decision maker (for whom a = 1, b = 1=2, and x = 13) at most be willing to pay to an insurance company in order to avoid the gamble specified in the previous question (b)?

u(x) = 1/b - 1*(a + b + x) 1 - 1/6) = * u(x) = 1/b - 1*(a + b + x) 1 - 1/6) = *