Explain how the graph shows which option lisa will choose

Reference no: EM133439718

Question: James and Lisa are offered a choice between options A and B:

A: Lottery =(0.5,$100;0.5,$20). This is a gamble with a 50% chance of winning $100 and a 50% chance of winning $20.

B: $40 for certain.

(a) James is risk-neutral. Will James choose A or B? (1 mark)

(b) Lisa is risk averse with wealth $100 and utility function U(x) = ln(x). Will Lisa choose A or B? (1 mark)

(c) Draw a graph showing the choices faced by Lisa, her utility curve and the expected utility of each option. Indicate the certainty equivalent of option A. Explain how the graph shows which option Lisa will choose.

Reference no: EM133439718

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