Question
Phil's vNM utility for money is () = exp(-x/300) where is Phil's final wealth level. He currently has $100 and is facing the following gamble.
Phil's vNM utility for money is () = exp(-x/300) where is Phil's final wealth level. He currently has $100 and is facing the following gamble. With 70% probability he receives $600. With 30% probability he receives $100. What is Phil's risk premium for this lottery? Note: There is a minus sign in the exponent. Also, note the expected value should be calculated in the "same units" as the vNM utility. In other words, if the vNM utility is over final wealth, then the expected value should be the expected value of final wealth. A. 98.35 B. 548.49 C. 1001.65 D. None of the above 20. Now assume everything is identical to the last problem, but Phil's starting wealth is now $1000. Specifically, Phil's vNM utility for money is () = exp J # &** K where is Phil's final wealth level. He currently has $1000 and is facing the following gamble. With 70% probability he receives $600. With 30% probability he receives $100. What is Phil's risk premium for this lottery? Note: If you round any values prior to solving for your risk premium, you might have answers that are slightly different. A. 2831.55 B. 98.35 C. 2801.65 D. None of the above Note: An individual whose Arrow-Pratt coefficient of absolute risk-aversion does not change with wealth is said to display constant absolute risk aversion. Given that the Arrow-Pratt coefficient of absolute risk-aversion is approximately proportional to the amount an individual would pay to avoid a bet, do your results from Questions 19 and 20 make sense?
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