Assume your utility function is the cube root your initial, Ask an Expert

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Assume your utility function is the cube root. Your initial wealth is $10k, and you are looking at a prospect of either losing $1000 with certainty, or losing $2000 or $0 with a 50-50 chance.

What is the difference between the utility of the certain outcome and the uncertain outcome? Enter answer accurate to 3 decimal places.

Hint: calculate the utility of the certain wealth outcome. Then calculate the expected value of the uncertain outcome in utility. Then find the difference!

Think also which alternative should you prefer, if you are an expected-utility maximizer.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92742629

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