Consider an individual that has an initial wealth of W = $100,000. With probability 1/3 she...

 

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Consider an individual that has an initial wealth of W = $100,000. With probability 1/3 she will lose $50,000 and with probability 2/3 she will gain $25,000. Find her certainty equivalent S (to the nearest dollar) for this consumer for each of the following utility functions, neatly setting up the equation that determines S. As a benchmark, please note that on average this consumer has expected contingent consumption of [1/3]$50,000+ [2/3]$125,000 = $100,000 to spend, but her situation is risky, sometimes her having only a little to spend and sometimes a lot. A risk-averse person will have S < expected contingent consumption. a) u(c) = c1/4 b) u(c) = c1/2 c) u(c) = c2/3 d) u(c) = In(c) C Consider an individual that has an initial wealth of W = $100,000. With probability 1/3 she will lose $50,000 and with probability 2/3 she will gain $25,000. Find her certainty equivalent S (to the nearest dollar) for this consumer for each of the following utility functions, neatly setting up the equation that determines S. As a benchmark, please note that on average this consumer has expected contingent consumption of [1/3]$50,000+ [2/3]$125,000 = $100,000 to spend, but her situation is risky, sometimes her having only a little to spend and sometimes a lot. A risk-averse person will have S < expected contingent consumption. a) u(c) = c1/4 b) u(c) = c1/2 c) u(c) = c2/3 d) u(c) = In(c) C

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