Reference no: EM131524529
Question: A bettor with utility function U(x) = ln(x), where x is total wealth, has a choice between the following two alternatives:
A Win $10,000 with probability 0:2
Win $1,000 with probability 0:8
B Win $3,000 with probability 0:9
Lose $2,000 with probability 0:1
a. If the bettor currently has $2,500, should he choose A or B?
b. Repeat a, assuming the bettor has $5,000.
c. Repeat a, assuming the bettor has $10,000.
d. Do you think that this pattern of choices between A and B is reasonable? Why or why not?
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