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An individual has a vNM utility function over money of u where r is final wealth She currently has $8 and can choose between the following lotteries Which lottery will she choose Lottery

An individual has a vNM utility function over money of u(x)-2s, where r is final wealth. She currently has $8 and can choose between the following lotteries. Which lottery will she choose? Lottery 1: Keep her $8. Lottery 2: Give up her $8 and face the gamble (0.2, 0.8, 0.0) over final wealth levels ($1, $8, $27) e . . Lottery 3: Give up her $8 and face the gamble (0.1, 0.5, 0.4) over final wealth levels ($1, S8, s27) a. Lottery 1 b. Lottery 2 c. Lottery 3 d. She is indifferent between the three lotteries. 2. An individual has a vNM utility function over money of u(x) r2, where x is final wealth Assume the individual currently has $16. He is offered a lottery with three possible outcomes; he could gain an extra $9, lose S7, or not lose or gain anything. There is a 15% probability that he will win the extra S9. What probability, p, of losing $7 would ensure that the individual chooses to not play the lottery? a. p >0.15 b. p> 1.08 c. p 0.415 d. p 0.0S

Apr 09 2020 View more View Less

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