Suppose that a consumer has the utility of wealth function U(w) = w2. This consumer
faces a risky gamble that pays $100 with chance 3/5 and $200 with chance 2/5. Calculate the risk premium of the gamble.
a) -8.14
b) -8.32
c) -8.45
d) -8.19
Next Four Questions.
A consumer has a utility function u : R2+ → R defined by
u(x) = 0 if x1x2 = 0
ln(x1x2) if x1x2 ≠ 0
Define the set which gives the consumer zero utility.
a) {x belongs to R2+ : x1 = 0 or x2 = 0} U { x belongs to R2+ : x1x2 = 1}
b) {x belongs to R2+ : x1 = 0 or x2 = 0} ∩ { x belongs to R2+ : x1x2 = 1}
c) {x belongs to R2+ : x1 = 0 or x2 = 0} U { x belongs to R2+ : x1 and x2 = 1}
d) None of the above
Are the above preferences homothetic?
a) Yes
b) No
c) Uncertain
Are the above preferences continuous ?
a) Yes
b) No
c) Uncertain
Do these preferences imply local non-satiation?
a) Yes
b) No
c) Uncertain
In q1. How do we calculate risk premium.
In the second set of questions, how do we come to know whether the preferences are homothetic, continous ?
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