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Unformatted text preview: (d) Since Joe is riskaverse, U ( z * 50 + (1z * )0) > z * U (50) + (1z * )0 = z * U (50) = U (10). U ( z * 50) > U (10). Since U(.) is strictly increasing in wealth, z * 50 > 10 EV ( Contract 2) > EV ( Contract 1). Question 5 . Let K be the Certainty Equivalent of Contract 2. U(K) = 0.5 U(50,000) K = 0 . 5 50 , 000 K = 12,500. Question 7 . Y is the same as K. Question 8 . (a) K (b) 15,000  K = 2500 (c) 0.5 U(50,000  X) + 0.5 U(1000  X) = EU(Contract 2) 50 , 000X + 1000X = 50 , 000 1...
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 Spring '08
 Govel
 Utility

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