contestada

An individual owns two assets: an initial wealth of $20, and a lottery ticket which will pay a prize of $10 with probability 0.5 and nothing with probability 0.5.

Find the minimum price at which the individual is willing sell his lottery ticket if his utility function is:

a. u(x) = x
b. u(x) = x2
c. How do you reconcile the difference between the answers found for (a) and (b)?

Respuesta :

Answer:

He will sell at 5

Step-by-step explanation:

Compute expected utility with the ticket:

1) EU = (0.5 × 30)+ (0.5 × 20) = 25 utils

We have to find the wealth level that provides the same utility as we have with the ticket:

Since U(x) = x

        x = 25

He will sell at = 5

2) EU = 0.5 × [tex](30)^{2}[/tex] + 0.5 × [tex](20)^{2}[/tex]

          = 650 utils

since U(x) = [tex]x^{2}[/tex]

or             x = [tex]\sqrt{U}[/tex]

               x = [tex]\sqrt{650}[/tex]

              x = 25.495

Otras preguntas