Consider the 3 uncertain situations below:
1: 35% chance of making $20 and a 65% chance of making $60
2: 45% chance of making $40 and a 55% chance of making $49
3: 80% chance of making $5 and a 20% chance of making $200
There are 3 different agents. Their utilities are a function of income only:
UA (W) = W2/3 UB (W) = W4/3 Uc (W) = W
a) Find the expected utility of each situation for each consumer.
b) From the results in (a), find the best situation for each consumer and explain how that choice makes sense in terms of risk aversion.