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9 If you are exposed to a 50/50 chance of gaining or losing $1,000 and insurance that removes the risk costs $500, at what level
9 If you are exposed to a 50/50 chance of gaining or losing $1,000 and insurance that removes the risk costs $500, at what level of wealth will you be indifferent relative to taking the gamble or paying the insurance? That is, what is your certainty equivalent wealth? Assume your utility function is U(W)=W1. 1 Security A pays $30 if state 1 occurs and $10 if state 2 occurs. Security B pays $20 if state 1 occurs and $0 if state 2 occurs. The price of security A is $5, and the price of security B is $10. (a) Set up the payoff table for securities A and B. (b) Determine the prices of the two pure securities. 4 Assume that you have a logarithmic utility function for wealth U(W)=ln(W) and that you are faced with a 50/50 chance of winning or losing $1,000. How much will you pay to avoid risk if your current level of wealth is $10,000 ? How much would you pay if your level of wealth were $1,000,000 ? 5 Given the exponential utility function U(W)=eaW : (a) Graph the function, assuming a
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