- #1
coldway
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A person has a utility function defined over her wealth given by
u(w)=ln(w). Her initial wealth is $2 and she faces a risky prospect in which she will
lose $1 with probability 0.4 and gain $1 with probability 0.6.
(i) Show that this person is risk averse by demonstrating that her utility function is
concave.
(ii) What is her expected utility of this gamble?
(iii) Find her maximum willingness to pay to avoid taking this risk.
u(w)=ln(w). Her initial wealth is $2 and she faces a risky prospect in which she will
lose $1 with probability 0.4 and gain $1 with probability 0.6.
(i) Show that this person is risk averse by demonstrating that her utility function is
concave.
(ii) What is her expected utility of this gamble?
(iii) Find her maximum willingness to pay to avoid taking this risk.