Suppose that an individual behaves according to the expected utility theory. Assume that the individual has...

 

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Suppose that an individual behaves according to the expected utility theory. Assume that the individual has an initial endowment of 2,000 dollars and his utility function takes the following values u(500) = 10, u(750) = 25, u(1,000) = 26, u(2,500) = 30, u(2,750) = 33, and u(3,000) = 40. If he faces a choice between getting a lottery (500, 1/2; 1000, 1/2) or 750 dollars for sure, will he strictly prefer the lottery or the money for sure? Or is he indifferent between them? Write down your calculation. Extra points for drawing a graph to explain if he is risk-loving, risk neutral, or risk averse. Suppose that an individual behaves according to the expected utility theory. Assume that the individual has an initial endowment of 2,000 dollars and his utility function takes the following values u(500) = 10, u(750) = 25, u(1,000) = 26, u(2,500) = 30, u(2,750) = 33, and u(3,000) = 40. If he faces a choice between getting a lottery (500, 1/2; 1000, 1/2) or 750 dollars for sure, will he strictly prefer the lottery or the money for sure? Or is he indifferent between them? Write down your calculation. Extra points for drawing a graph to explain if he is risk-loving, risk neutral, or risk averse.

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Absolutely lets analyze this decision according to expected utility theory Expected Utility of the L... View the full answer