This is not an ex@m question this a practice ex@m, read the title better next ti

Question

This is not an ex@m question this a practice ex@m, read the title better next time

Practice Final Exam -0 Points Questions 1-4 rely on the following prompt Risky Prospect Y is defined as: Y = ($0, 0.35; $16, 0.50; $81, 0.15). Marco's utility of wealth function is given by u(x) =( in case the font is too small, that says "fourth root of x") 1. What is the value of EV(Y)? 2. What is the value of SD(Y) (the standard deviation of prospect Y)? 3. What is the value of EU(Y) for Marco? 4. What is Marco's certainty equivalent for Y (what is the value of CE(Y))? (Hint: if (x) = Vx, then f-1 (x) = x4 ).

Explanation / Answer

1.

Expected value of Y = (0 * 0.35) + (16 * 0.50) + (81 * 0.15)

Expected value of Y = $20.15

2.

Standard deviation of Y = [ (0 - 20)^2 * 0.35 + (16 - 20)^2 * 0.50 + (81 - 20)^2 * 0.15]

Standard deviation of Y = 140 + 8 + 558.15

Standard deviation of Y = 706.15

3.

EU (Y) = x4th root = 204th root

EU (Y) = 2.11 utils

4.

CE(Y) = X4 = 204

CE(Y) = $160,000

You can ask the other questions separately. Not all the questions can be answered at once, according to the guidelines. I have answered the first four, hope it helps!

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