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7. (24 points - 8 pts each) X Suppose that Jim has an expected utility function U(r) = vr over the amount of his income
7. (24 points - 8 pts each) X Suppose that Jim has an expected utility function U(r) = vr over the amount of his income per year of Sa. (a) Sketch the general shape of Jim's utility function with income + on the T axis and utility on the y axis. Explain how we can determine Jim's risk preferences (ie, is he risk averse; risk seeking; or risk neutral) from the shape of the utility function. (b) What is the certainty equivalent of a lottery that gives Jim a 25% chance of = 10,000 and a 75% chance of I = 90,000? Assume that Jim has no other wealth or income. (c) What is Jim's risk premium of the lottery from part (b)? Explain what this number means
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