Answer the following:

1) You can blind-draw a small ball from a pot containing 6 red balls and 4 black balls. If you draw a red you win 20, if you draw a black, you loose 10. Compute the expected value of this gamble and specify whetherit is a fair gamble?How does expected utility theory distinguish between risk-seeker and risk-averse individuals?

2) Define the expected utility of a gamble and summarize the essence of the expected utility theory.

3) Draw the utility function of a risk-seeker individual and explain graphically why risk seekers always accept a fair gamble.

4) Draw the utility function of a risk-averse individual and explain graphically why a risk-averse individual always rejects a fair gamble.