Consider a person with the following utility function over wealth
Question # 00391209
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Updated on: 09/20/2016 11:57 PM Due on: 09/21/2016
Answer the questions using Excel
Consider a person with the following utility function over wealth: u(w) = ew, where e is the exponential function (approximately equal to 2.7183) and w = wealth in hundreds of thousands of dollars. Suppose that this person has a 40% chance of wealth of $100,000 and a 60% chance of wealth of $2,000,000 as summarized by P(0.40, $100,000, $2,000,000).
a. What is the expected value of wealth?
b. Construct a graph of this utility function.
c. Is this person risk averse, risk neutral, or a risk seeker?
d. What is this person’s certainty equivalent for the prospect?
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Solution: Consider a person with the following utility function over wealth