10. Risk Pooling and Risk Sharing II Janet has CARA preferences. She has initial wealth w and is offered the opportunity to buy a lottery ticket. If she buys it, her final wealth will be either w + 4 or w 2, each equally likely. She is indifferent between buying the ticket and not buying it. (a) Explain whether she is risk averse, risk neutral, or risk loving. Draw this situation in state-contingent income space, with the 'good' outcome on the horizontal axis and the 'bad' outcome on the vertical axis. (b) She offers her friend Sam (who has the same initial wealth and preferences as she does) the following proposition: they buy the ticket together, and share the cost and proceeds equally. Should Sam accept? Illustrate your answer in a diagram. (c) Sam has another idea: they buy two tickets (whose outcomes are independent), again sharing the costs and proceeds equally. Is this better than buying no tickets? 10. Risk Pooling and Risk Sharing II Janet has CARA preferences. She has initial wealth w and is offered the opportunity to buy a lottery ticket. If she buys it, her final wealth will be either w + 4 or w 2, each equally likely. She is indifferent between buying the ticket and not buying it. (a) Explain whether she is risk averse, risk neutral, or risk loving. Draw this situation in state-contingent income space, with the 'good' outcome on the horizontal axis and the 'bad' outcome on the vertical axis. (b) She offers her friend Sam (who has the same initial wealth and preferences as she does) the following proposition: they buy the ticket together, and share the cost and proceeds equally. Should Sam accept? Illustrate your answer in a diagram. (c) Sam has another idea: they buy two tickets (whose outcomes are independent), again sharing the costs and proceeds equally. Is this better than buying no tickets