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What is the monetary certainty equivalent

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Reference no: EM13493668

As you know, utility functions incorporate a decision maker's attitude towards risk. Let's assume that the following utilities were assessed for Stephanie Parker.

x

u(x)

-$400

0

-$365

10

-$320

20

-$270

30

-$200

40

-$110

50

$0

60

$130

70

$300

80

$600

90

$800

95

$1,100

100

Use these utilities to answer the following questions.

a) What is the monetary certainty equivalent for the following gamble: gain $130 with probability 0.4, lose $320 with probability 0.6.

b) What is the risk premium in a)? Explain the concept of a risk premium in addition to calculating its value for a).

c) What probability P would make Stephanie become indifferent between getting $130 for sure or taking the following gamble?

Reference no: EM13493668

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