Game Theory Calculations


 
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Game Theory Calculations
Zheng, Student (University), Australia

A person has a utility function defined over her wealth given by
U(w) = ln(w). Her initial wealth is $2 and she faces a risky prospect in which she will lose $1 with a probability of 0.4 and gain $1 with a probability of 0.6.
(i) Show that this person is risk averse by demonstrating that her utility function is concave.
(ii) What is her expected utility of this gamble?
(iii) Find her maximum willingness to pay to avoid taking this risk.

 
   















 

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