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Problem 3 An agent has the following utility function, U(W) = VW. The agent can take part in a gamble where she can get either
Problem 3 An agent has the following utility function, U(W) = VW. The agent can take part in a gamble where she can get either 200,000 with probability 60% or 0 with probability 40%. Assume that her initial wealth Wo is 160,000. a) What is the expected payoff of the lottery? And the expected utility? Is the agent risk averse or risk lover? Explain! b If she already owns the gamble, denote the minimum price she would sell it for by Ps. Write down the expression P, has to satisfy. c) What are the certainty equivalent and the risk-premium for this game? Problem 3 An agent has the following utility function, U(W) = VW. The agent can take part in a gamble where she can get either 200,000 with probability 60% or 0 with probability 40%. Assume that her initial wealth Wo is 160,000. a) What is the expected payoff of the lottery? And the expected utility? Is the agent risk averse or risk lover? Explain! b If she already owns the gamble, denote the minimum price she would sell it for by Ps. Write down the expression P, has to satisfy. c) What are the certainty equivalent and the risk-premium for this game
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