Alice maximizes expected utility with an index ux radic x, Business Economics

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Alice maximizes expected utility with an index ux radic x

Alice maximizes expected utility with an index u(x) = √ x where x is the total annual income. Her annual wage is $90000 and she gets an extra bonus of $70000 with probability 0.5. Alice’s certainty equivalent of this gamble is

(A) 115000; (B) 122500; (C) 125000; (D) 160000.

Alice’s risk premium for this gamble is

(A) 0; (B) 125000; (C) 2500; (D) 35000.

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Business Economics: Alice maximizes expected utility with an index ux radic x

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Business Economics: Alice maximizes expected utility with an index ux radic x

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