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Jamal has a utility function U=W 1/2 ,where is his wealth in millions of dollars and U is the utility he obtains from that wealth In the final stage of a game show, the host offers Jamal a choice

Jamal has a utility function U=W^{1 / 2},where is his wealth in millions of dollars and U is the utility he obtains from that wealth. In the final stage of a game show, the host offers Jamal a choice between (A) $4 million for sure, or (B) a gamble that pays $1 million with probability 0.6 and $9 million with probability 0.4.

a.  Graph Jamal's utility function. Is he risk averse? Explain.

b.  Does A or B offer Jamal a higher expected prize? Explain your reasoning with appropriate calculations. (Hint: The expected value of a random variable is the weighted average of the possible outcomes, where the probabilities are the weights.)

c.  Does A or B offer Jamal a higher expected utility? Again, show your calculations.

d.  Should Jamal pick A or B? Why?

Jul 16 2021 View more View Less

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