Consider two individuals, Dani and Tom. Dani's utility function is given by U(C)=In(c), where c is...

 

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Consider two individuals, Dani and Tom. Dani's utility function is given by U(C)=In(c), where c is the amount of consumption in a given period. Tom's utility is U(C)=c^2 a) In two separate graphs, draw Dani and Tom's utility function (U in y-axis, c in x-axis). b) Both Dani and Tom can purchase a lottery that pays 5 with 75% probability, and 15 with 25% probability. Calculate and mark on the graphs the utility evaluated at the expected level of consumption for the lottery. Then calculate and mark on the graphs the expected utility for Dani and Tom. c) How do utilities at the expected level of consumption compare to the expected utility? What explains the difference between Dani and Tom? What implication does this difference have for their risk preferences? Consider two individuals, Dani and Tom. Dani's utility function is given by U(C)=In(c), where c is the amount of consumption in a given period. Tom's utility is U(C)=c^2 a) In two separate graphs, draw Dani and Tom's utility function (U in y-axis, c in x-axis). b) Both Dani and Tom can purchase a lottery that pays 5 with 75% probability, and 15 with 25% probability. Calculate and mark on the graphs the utility evaluated at the expected level of consumption for the lottery. Then calculate and mark on the graphs the expected utility for Dani and Tom. c) How do utilities at the expected level of consumption compare to the expected utility? What explains the difference between Dani and Tom? What implication does this difference have for their risk preferences?

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a Danis utility function ule Inc u 1 0 du c dc ie duc dc2 0 for c0 U C is positively sloped ... View the full answer