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Consider a person with the following utility function over wealth: u(w)=e^w, where e is the exponential function (approximately equal to 2.7183) and w=wealth in hundreds of thousand of dollars. Supose that this person has a 40% chance of wealth of $50,000 and a 60% chance of wealth of $1,000,000 as summarized by:
P(0.40, %50,000, $1,000,000).

A. What is the expected value of wealth?
B. Construct a graph of this utility function.
C. Is this person risk averse, risk neutral, or a risk seeker?
D. What is this person's certainty equivalent for the prospect?

 

Basic Finance, Finance

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