An individual can play a lottery X. You know that the individual's instantaneous utility is u(w) = √w. Suppose you wanted to know whether the certainty equivalent of playing the lottery for that individual is higher than, equal to, or lower than the expected value of the lottery. Which additional piece of information, if any, would you need to answer that question? (a) The values of the possible outcomes of the lotteries, the corresponding probabilities, and initial wealth of the individual. (b) The values of the possible outcomes of the lotteries and the corresponding probabilities. (c) The probabilities associated with each possible outcome and the initial wealth of the individual. (d) The values of the possible outcomes of the lotteries and the initial wealth of the indi- vidual. (e) No additional information is needed.
An individual can play a lottery X. You know that the individual's instantaneous utility is u(w) = √w. Suppose you wanted to know whether the certainty equivalent of playing the lottery for that individual is higher than, equal to, or lower than the expected value of the lottery. Which additional piece of information, if any, would you need to answer that question? (a) The values of the possible outcomes of the lotteries, the corresponding probabilities, and initial wealth of the individual. (b) The values of the possible outcomes of the lotteries and the corresponding probabilities. (c) The probabilities associated with each possible outcome and the initial wealth of the individual. (d) The values of the possible outcomes of the lotteries and the initial wealth of the indi- vidual. (e) No additional information is needed.
Chapter7: Uncertainty
Section: Chapter Questions
Problem 7.3P
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Transcribed Image Text:An individual can play a lottery X. You know that the individual's instantaneous utility
is u(w) = √w. Suppose you wanted to know whether the certainty equivalent of playing
the lottery for that individual is higher than, equal to, or lower than the expected value of
the lottery. Which additional piece of information, if any, would you need to answer that
question?
(a) The values of the possible outcomes of the lotteries, the corresponding probabilities,
and initial wealth of the individual.
(b) The values of the possible outcomes of the lotteries and the corresponding probabilities.
(c) The probabilities associated with each possible outcome and the initial wealth of the
individual.
(d) The values of the possible outcomes of the lotteries and the initial wealth of the indi-
vidual.
(e) No additional information is needed.
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