Question part a)

3. [20 marks} This questions aims to deepen your understanding of the oonoept of degree of risk aversion and make you more aware of your own attitude toward risk. Consider two scenarios: 1] Your current wealth is $1000. You need to pay $200 for playing a game. This games allows you to win a prize of $1000 with probability 1X4 and nothing with probability 3,34. 2] Your current wealth is $10. 1if'ou need to pay $2 for playing a game. This games allows you to win a prize of $16 with probability 1,!'4 and nothing with probability sis. Answer the following questions: (a) {10 marks] Are you going to play this game in scenario 1) and 2)? Based on your decisions, oomment on your degree of risk aversion. That is, do you think you have increasing or decreasing or constant relative risk aversion (or absolute risk aversion}? [b] (10 marks} Choose a utility function that best describes your attitude toward risk {refer to Topie3_slides for some examples of utility function, but you are not restricted to choose from this list}, compute your expected utilities from playing the game or staying away from it in both scenarios. Are your decisions in {a} justiable by this utility function? Briey explain why or why not