ps4_101_2011

ps4_101_2011 - Economics 101 Problem Set 4 Due Tuesday...

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Unformatted text preview: Economics 101 Problem Set 4 Due Tuesday, February 22, 2011 George J. Mailath Please indicate your recitation time/number and recitation instructor on your answer. 1. The certainty equivalent of a lottery (gamble) X is the amount of money for which the individual (with utility for money u and wealth w ) is indifferent between the lottery X and the certain amount c ; that is, Eu ( w + X ) = u ( w + c ) . (The certainty equivalent may be negative.) Suppose Edward has utility function over money u ( w ) = √ w , and initial wealth w = $4. Consider the gamble X given by X = $12 , with probabilty 1 3 , − $4 , with probabilty 2 3 . (a) What is the expected value of the gamble X ? (b) What is Edward’s expected utility if he accepts the gamble X ? (c) What is Edward’s certainty equivalent of the above gamble? (d) Discuss the relationship between the expected value of the gam- ble, Edward’s certainty equivalent of the gamble, and his atti- tudes towards risk....
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This note was uploaded on 03/02/2011 for the course ECON 101 taught by Professor Dannicatambay during the Spring '08 term at UPenn.

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ps4_101_2011 - Economics 101 Problem Set 4 Due Tuesday...

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