Assignment:
Use the following table, which shows Jimmy's and Zelda's utility of wealth schedules, to work Problems 15 to 17.
|
Wealth
|
Jimmy's utility
|
Zenda's utility
|
|
0
|
0
|
0
|
|
100
|
200
|
512
|
|
200
|
300
|
640
|
|
300
|
350
|
672
|
|
400
|
375
|
678
|
|
500
|
387
|
681
|
|
600
|
393
|
683
|
|
700
|
396
|
684
|
1. What are Jimmy's and Zelda's expected utilities from a bet that gives them a 50 percent chance of n having a wealth of $600 and a 50 percent chance of having nothing?
2. a. Calculate Jimmy's and Zelda's marginal utility of wealth schedules.
b. Who is more risk averse, Jimmy or Zelda? How do you know?
3. Suppose that Jimmy and Zelda each have $400 and are offered a business investment opportunity that involves committing the entire $400 to the project. The project could return $600 (a profit of $200)with a probability of 0.85 or $200 (a loss of $200) with a probability of 0.15. Who goes for the project and who hangs on to the initial $400?