Question

Please answer Exercises 1

1.1 Thinking about your own u functioin Here is a question we could ask you indifferent between having 5k for sure and having 1 k with probability π1 and 10k with probability (1- T). Suppose person n answers Ti-.3. If we interpret that answer in terms of expected utility, then we have the equation person n. For what magnitude of πι are where the second equality comes from the normalization, un (1k)0 and Having determined that un(5k) - .7, we could ask other questions. For example, we could ask, for what magnitude of πι is person n indifferent between having 3k for sure and having 1k with probability T1 and 5k witlh probability (1-π). Suppose they answer, πι 2. If we interpret that answer in terms of expected utility, then we have the equation where the second equality comes from the normalization, un (1k)0 and the previous result that un(5k) = .7. Notice that we are eliciting person n's attitude toward risk. There are no right or wrong answers to these answers Exercise 2 Put yourself in the position of person n and pose and answer4 questions that permit you to find your u function for 4 different magnitudes of r between 1k and 10k. Use some software to sketch those points of your u function. Exercise 3 Ertend the previous erercise to some magnitudes of and some magnitudes of < lk 10k

Answer 1