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Question: assume that calista has preferences over money that may be...

Question details

Assume that Calista has preferences over money that may be described by the following utility

function: U($X)= [1 + SQRT($X)]

Further, assume that a fair coin is tossed. If the coin comes up heads, then Calista will be paid

$100, otherwise Calista will be paid $0. Answer each question and show all work.

1. What is the expected value of the coin toss?

2. What is the expected utility of the coin toss?

3. What is Calista’s risk premium for this gamble (measured in utils)?

4. What is Calista’s risk premium for this gamble (measured in dollars)?

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