How could you intuitively explain such behavior

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Question: We discussed decreasing and constant risk aversion. Are there other possibilities? Think about this as you work through this problem. Suppose that a person's utility function for total wealth is

U(A) = 200A - A2  for 0 ≤ A ≤ 100

where A represents total wealth in thousands of dollars.

a. Graph this preference function. How would you classify this person with regard to her attitude toward risk?

b. If the person's total assets are currently $10,000 should she take a bet in which she will win $10,000 with probability 0.6 and lose $10,000 with probability 0.4?

c. If the person's total assets are currently $90,000 should she take the bet given in part b?

d. Compare your answers to parts b and c. Does the person's betting behavior seem reasonable to you? How could you intuitively explain such behavior?

Reference no: EM131524522

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