Question

Questions 1-4 rely on the following prompt Risky Prospect Y is defined as: Y = ($0, 0.25; $8, 0.50; $64, 0.25). Marco's utility of wealth function is given by u(x) = Vx (in case the font is too small, that says "fourth root of x”). 1. What is the value of EV(Y)? 2. What is the value of SD(Y) (the standard deviation of prospect Y (Round to the nearest hundredth). 3. What is the value of EU(Y) for Marco? 4. What is Marco's certainty equivalent for Y (what is the value of CE(Y))? (Hint: if (x) = Vx, then f-1(x) = x3).

Answer 1

O Given Risky prospect yis defined as Ya $ 30,0.25; $8,0508; $64,0.95} macro's uihility a wealth function C2235e Cincare the font is too small. - then taum noot fr ) Value q EV (Y) -) 0X0.25 +8X0.50 7 64 XO:35 - - 0 +4 +6 = 20 & Valuez soy) = foxo 23 +880.507 +64 x0.25) - o +2+4= 6 3 Eur = Sum Produce probabilish your comes, =) (0.95 Xo] + Touso xcogl9]+[oos x6w)3] = 0 + (oso xpytany + forse tootle] Here blare consider tatoon fourth not => 0 +[0.50 x(23)97 [085x63%] a) Toso x2] +(6:26 xa] 21 += 2.

- value of CEY) = Hine if(u) = 3.ge then f(x) = 2] EWY)= (CE) 3 2= CELY CALDO = = 8 E CEL)=8]