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Problem: Consider the following lottery: with Prob 13 it yields payoff $0, with Prob 16 it yields $4, with remaining probability it yields $9. Explain your answers and provides examples.

Required:

(a) Calculate the expected payoff of this lottery.

(b) Suppose John's preference over monetary payoff the is represented by the utility function u(w) = 2w+100, where w is the amount of monetary payoff. What's the certainty equivalent of this lottery for John?

(c) Suppose John's wife Mary has utility function over monetary payoff v(w) =√w. what's the certainty equivalent of this lotteryfor Mary?

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