Suppose that you can only send $100 to home by ship. All ships sink independently with probability 1/2 . (Wilson 2016 Econ 455 Notes)

(a) What is the expected value of sending your $100 in 1 ship?

(b) What about 3 ships?

(c) Complete the following table. How should each individual send their money?

Utility function

Risk preference

Expected utility of 1 ship

Expected utility of 3 ships

u = x

u = x

u = 1/2x^2

Where x is the amount of money that arrives home.

(d) Suppose that your utility was given by u = x. What is the certainty equivalent of sending your money home on 1 ship?