Answer to Question #288190 in Microeconomics for Likenaw

Question

Consider a lottery with two equally likely outcomes, $ 25 and $ 144, with associated utility

function of individuals A, ua (m) = √100m and individual B, ub (m)= 5 meter square

a) Determine expected utility and utility of expected value of the lottery for each

individual?

b) Define and compare certainty equivalent of individual A and B?

c) Compare risk premium of individuals A and B? Why risk premium of individual A is

higher?

d) Compare and interpret the absolute risk aversion, ra (m) of the two persons?

Answer 1

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