Gilbert wants to maximize his expected utility. His preferences are represented by the utility

function U(w) =

p

w where w is his monetary payo. Gilbert is oered the following bet on the

toss of a fair two-sided coin by Anne. If the coin comes up tails, Anne pays Gilbert |10,000. If

the coin comes up heads, Gilbert pays Anne |10,000. Gilbert's initial wealth is |10,000 which

he retains in its entirety if he does not take the bet.

(a) What is Gilbert's expected utility if he accepts the bet? [3 points]

1. 0

2. 70:71

3. 100

(b) Is Gilbert risk averse, risk neutral or risk loving? [1 point]

1. risk averse

2. risk neutral

3. risk loving

(c) Will he accept the bet? [2 points]

1. He will accept the bet

2. He will reject the bet

3. He is indierent between accepting and rejecting the bet

(d) Given that Gilbert loses his entire |10,000 if the coin comes up heads, what is the smallest

amount that Anne has to pay Gilbert in the event of tails to persuade him to take the bet? [4

points]

1. 30; 000

2. 5; 000

3. 10; 000

need detailed solution with explanation