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  3. a. suppose joans utility function is u(x) = ln(500

a. Suppose Joans utility function is u(x) = ln(5000 + x) (instead of x.5?as in...

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Accounting

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  1. a. Suppose Joans utility function is u(x) = ln(5000 + x) (instead of x.5?as in example 2).

b. Given her new utility function solve the problem of how much she will be willing to pay to insure the loss of her house.

  1. c. According to the example, currently her asset position is $100,000. Suppose she was invited to participate in a project which required an upfront investment of $5000, and will end up either with a net gain of $2000 or with a net loss of $1500, both being equally probable. Will she take up the project?
  2. Calculate the certainty equivalent of the gamble she is being offered.

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