Question
Consider the following decision makers (with w indicating the wealth state and U indicating the utility function over money): Divya: w = 10; U(y) =
Consider the following decision makers (with w indicating the wealth state and U indicating the utility function over money): Divya: w = 10; U(y) = y 0.5 Aastha: w =10; U(y) = y Bhavna: w =10; U(y) = y 2 2.1. Categorize our three decision makers based on whether they are risk averse, risk seeking, or risk neutral. 2.2. Consider the following gambles, represented in the format xi = (xi1, pi1; xi2, pi2): x1 = (4, 0.35; -2, 0.65) x2 = (10, 0.25; -3, 0.75) x3 = (0.1, 1) Calculate the expected utilities for each of our gambles for each of our decision makers, in order to fill out the following table: 2.3. Which of the three gambles will Divya choose? 2.4. Now imagine that Divya gets a gift of $200 from her friend, so that she has w = 210. What will be her choice now? 2.5. Which of the three gambles will Aastha choose? 2.6. Now imagine that Aastha gets a gift of $200 from her friend, so that she has w = 210. What will she now choose?
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