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QUESTION
Dorothy has a utility function of the form U w0.5 , and faces a situation in which income is $36 with probability 0.5 and $100 with probability 0.
Dorothy has a utility function of the form U w0.5 , and faces a situation in which income is $36 with probability 0.5 and $100 with probability 0.5.
(a) Dorothy is indifferent between a certain payoff of $x and this gamble. What is x?
(b) Suppose Dorothy is offered, for $32, full insurance for the $64 (potential) loss. Will she buy it? Why?
