Question

utility function

Question #A4/04 [20 marks] Mr. E. Kisan is eager to make his utility function explicit. So he approaches his financial consultant, Mr. Chelumala Rishi ReYanth for help who places before Mr. Kisan a choice of a or Rs. 100 (say W2) with probabilities p and (1-p) lottery giving either Rs. 10 (say Wi) respectively. As the value of p is changed Mr. E. Kisan, makes a decision and is able to decide on each corresponding values of C (certainty equivalent). The financial consultant, Mr. w, hence E[U(W)] p*Wi + (1-p)*W2. Using Chelumala. Rishi Revanth, assigns U(W) this information we have the following table 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 10 19 28 46 37 55 64 73 82 91 E[U(W)] 100 05 10 15 25 35 50 60 75 90 100 I10 What can you say about the characteristics of the utility function of Mr. Kisan? Draw graphs wherever necessary (use graph paper as provided). END OF ASSIGNMENT # 04 ++

Answer 1

When C ECUCWI poirt is of utmot importanre that pafiu of inveta chanses berause thet for o.3 p 4 IF observe Fhar you E[vinJ= that Y sk neutre ot tHh makes ConjuMer cCucw paint rnt point belaw n 1aving 4 ECUCW) 7C Conjumev means k avevje ConuM ev Mates Risk loving agent, For Reasoniry i s Risk premium EMV- CE when P= 0.3 o(.3) + lo0(0-9J EmV 1 23 3-25-2 0 Risle seekev Risk premiurs When 10(0 4) 1oo (0-) EMU 64 Risヒ-avevse 64-6024 70 Risk premiuM =

EU(W)A c(uiwi) Risk avevJe behoviu 63.5E(U(m)) behoviour Risk neutrc Risk seeker behoviau 68-5-CE

When ECUCWI poirt is of ufmost importan ce that because that chanses pfiu of Yisk invefar IF you observe that for 4 O 3 p C that makes rsk neutrt ct thi COnsummer point below ECucw this point くc Means Consumev laving g ECUCW) 7C mates sk averje Consumev

Risk loving asent, far Reasoniry is Risk premium EMV- CE O 7 when P= 0.3 |0(0.3) + lo0(0.2J EMV 23-25-2 0 Risk premiuM Risleseekev When 10004) t100 (0-0) EMU 64 Riste premiuM C4-60 470 Rist-avevve