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As you know, utility functions incorporate a decision maker's attitude towards risk. Let's assume that the following utilities were assessed for Sarah Troublemaker: x u(x)

As you know, utility functions incorporate a decision maker's attitude towards risk. Let's assume that the following utilities were assessed for Sarah Troublemaker:

x u(x)
-$1,000 0
$0 30
$200 50
$500 100

  1. Would a risk neutral decision maker be willing to take the following deal: 40% chance of winning $500, 20% chance of winning $200 and a 40% chance of losing $1,000?
  2. Using the utilities given in the table above, determine whether Sarah would be willing to take the deal described in part a?
  3. Is Sarah risk averse or is she a risk taker? What is her risk premium for this deal?

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