Matt has waited a long time for her truck to come in. He thinks that it...

Matt has waited a long time for her truck to come in. He thinks that it will come today with a 1/4 probability. If it comes, he will receive $1600. If it doesn't come today, it never will and he will have zero wealth.

He has a Bernoulli utility function equal to the square root of his total income. (bernoulli utility function = (total income)^(1/2)

What is the minimum price at which he would sell the rights to his truck?

Solutions

Expert Solution

U = √w

w : income

EU = .25*√1600 + .75√0

= .25*40

= 10

So, Certainty Equivalent, CE

U(CE) = EU

√CE = 10

CE = 100

Thus Minimum price, so that expected utility is unchanged

Is $ 100

Rahul Sunny answered 2 years ago

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