Suppose that an individual's utility function for money is given by u left parenthesis x right parenthesis equals left parenthesis 50 comma 000 plus x right parenthesis to the power of 1 third end exponent. Suppose the individual is considering making a risky investment, which would pay $20,000 with probability .6, or -$5,000 with probability .4. What is the expected monetary outcome of this investment?
Answer $10000
Suppose that an individual's utility function for money is given by u left parenthesis x right parenthesis equals left parenthesis 50 comma 000 plus x right parenthesis to the power of 1 third end exponent. Suppose the individual is considering making a risky investment, which would pay $20,000 with probability .6, or -$5,000 with probability .4. What would be the value of a riskless "for sure" investment that would make him indifferent between it and the risky investment mentioned above? In other words, what is the individual's certainty equivalent of this risky investment?
