{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

# HW 6 - #2 U(w = 3w^.5 W = 100 U(100 = 30 EU...

This preview shows pages 1–2. Sign up to view the full content.

HW 6 #1 Alvin’s utility function is U = W Barry’s utility function is U = W^2 Carl’s utility function is U = W^0.5 Initial W = 100 Alvin U(100) = 100 Barry’s U(100)= 10,000 Carl’s U(100)= 10 Alvin’s EU = .9(U(0)) + .1(U(1000)) = .9(0) + .1(1000) = 100 Barry’s EU = .9(U(0)) + .1(U(1000)) = .9(0) + .1 (1,000,000) = 100,000 Carl’s EU = .9(U(0)) + .1(U(1000)) = .9(0) + .1(√1000) = 3.16 Alvin’s expected utility from the bet equals his certain utility from his wealth. He is indifferent to the investment. He is risk neutral. Barry’s expected utility from the bet = 100,000 compared to his certain utility from his current wealth of 10,000. He will invest and is risk loving. Carl’s expected utility from the bet is 3.16. This is less than his certain utility from his wealth of 10. He is risk adverse and will not invest.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: #2 U(w) = 3w^.5 W = 100 U(100) = 30 EU = .03(U(25-5)) + .97(U(100-5)) = .03(13.416) + .97(29.24) = 28.765 Stephan’s certain utility is 30 from his current wealth. His expected utility from the bet is 28.765. He is risk adverse and will not take the bet. #3 U(∏) = 0 runs it herself E(∏) = E(U) .7(10) +.2(90) + .1(.790) = 90 Agent w = 10 L = w (1/2) – 2 = 1.16 H = w (1/2) – 3 = .16 Plan C1 effort 100 800 L 0.7 0.2 0.1 H 0.1 0.2 0.7 C2 W = 40 if ∏ = 800 L= ((√40-2) *.1)) + ((-2) *. 7) + ((.2) * 2)) = -1.350 H = ((-3) *1) + ((-3)*.2) + ((√ 40) – 2(.7)) = 1.43 E(∏) = EU2 = .1(0) + 100(.2) + 760(.7) = 552 a) He would accept either compensation method. b) Bucarram would like C2 if he works hard because his Expected utility is highest. c) E(U2) > E(U1) so C2 is better for Sloan too....
View Full Document

{[ snackBarMessage ]}

### Page1 / 2

HW 6 - #2 U(w = 3w^.5 W = 100 U(100 = 30 EU...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online