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3. (6 points) At income level x, a risk with a relative size e has the following payoff: with probability 0.5 you gain ex and
3. (6 points) At income level x, a risk with a relative size e has the following payoff: with probability 0.5 you gain ex and with probability 0.5 you lose ex. For a risk averse agent to bear this risk, we need to increase the odds of the favorable outcome. Define the minimum amount of odds that has to be shifted towards the favorable outcome, o, as the solution to the following. (0.5 + 8) . u(2(1 + E)) + (0.5 -8) . u(2(1 -E)) = u(x) Suppose that x = 1000 and e = 5%. Suppose that money utility is in the power utility family with coefficient y. More specifically, u(x) = 1-7 Calculate the value of d for y = 0.5, 4, and 10
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