Rosco has a utility function over money logi where log is, Ask an Expert

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Rosco has a utility function over money = log(I) where log is base 10 and I is money. His initial income (I) is $1000. Suppose he must accept one of three bets:

Bet (I): Win $100 with probability 1⁄2; lose $100 with probability 1⁄2

Bet (II): Win $100 with probability 3⁄4; lose $300 with probability 1⁄4

Bet (III): Win $100 with probability 9/10; lose $900 with probability 1/10

(a) Graph each of these of a utility-of-income graph with income on the horizontal and utility on the vertical axis, calculating the utility derived from each bet.

(b) Show that each of these bets are fair bets.

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Business Economics, Economics

Category:- Business Economics
Reference No.:- M91835818

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