Question

In attempting to quantify its attitude toward risk, top management of the pharmaceutical company has reported certainty equivalent values for a variety of 50-50 risks. These are summarized in the following table. Outcome of 50-50 Risk $200 and $o $200 and $50 $50 and S0 $200 and $112 $112 and $50 $50 and $13 $112 and $13 Certainty Equivalent $ 50 112 13 153 70 28 50 the company's CE for a 50-50 risk between $200 million and $0 is $50 million, and so on. US200-100 and U(SO) О. Show that U(SSO)-50. US 112)s 75, and so on.) construct a utility graph by plotting b.Consider the mathematical utility function , where U is the utility value corresponding to monetary outcome y umn. (Hint: Set a. Use these responses to determine utility values for each of the monetary values in the second col and drawing a smooth curve. (You may wish to check the ut ility values in Problem 13 against your curve.) Check that this function is an accurate description of the pharmaceutical company's attitude t

Answer 1