15.7. Consider two lotteries, A and B. With lottery A, there is a 0.90 chance that you receive a payoff of $0 and a 0.10 chance that you receive a payoff of $400. With lottery B, there is a 0.50 chance that you receive a payoff of

$30 and a 0.50 chance that you receive a payoff of $50.

a) Verify that these two lotteries have the same expected value but that lottery A has a bigger variance than lottery B.

b) Suppose that your utility function is Compute the expected utility of each lottery. Which lottery has the higher expected utility? Why?

c) Suppose that your utility function is U ! I " 500.

Compute the expected utility of each lottery. If you have this utility function, are you risk averse, risk neutral, or risk loving?

d) Suppose that your utility function is U ! (I " 500)2

.

Compute the expected utility of each lottery. If you have this utility function, are you risk averse, risk neutral, or risk loving?