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An individual has the following utility function: u(w)=w^5 where w=wealth.

a. Using expected utility, order the following prospects in terms of preference, from the most to the least preferred:
P1(.8, 1000, 600)
P2(.7, 1200, 600)
P3(.5, 2000,300)

b. What is the certainty equivalent for prospect P2?

c. Without doing any calculations, would the certainty equivalent for prospect P1 be larger or smaller? Why?

 

Basic Finance, Finance

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