Suppose that you are offered the choice between $4 and the following gamble, G: 1/4 probability of
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Suppose that you are offered the choice between $4 and the following gamble, G: 1/4 probability of winning $9 and a 3/4 probability of winning $1.
(a) Suppose that your utility function is u(x)5 !x . What is the utility of $4?
What is the utility of G? What is the certainty equivalent? Which would you choose?
(b) Suppose instead that your utility function is u(x) 5 x2. What is the utility of $4? What is the utility of G? What is the certainty equivalent? Which would you choose?
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