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Maxim has a utility function of the form u(w) = Vw. He has an initial wealth of 4 euros. He also has a lottery ticket
Maxim has a utility function of the form u(w) = Vw. He has an initial wealth of 4 euros. He also has a lottery ticket that will be worth 12 euros with probability 1/2 and zero otherwise. Derive Maxim's coefficients of absolute and relative risk aversion. What is the lowest price at which he would be prepared to sell the lottery ticket? Suppose that he did not have the lottery ticket. What is the maximum price he would pay to obtain it? Why does this price differ from your answer to (ii)? Now, let us introduce Kim, who has a utility function of the form u(w) = w3/4. Can you state in general which of the two persons is more risk-averse
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