omework: Chapter 14: Managerial Decision Making Under Unc ore: 0 of 1 pt 80115 (

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omework: Chapter 14: Managerial Decision Making Under Unc ore: 0 of 1 pt 80115 (15 complete) HW Score: 80.56%, 12.08 of 19 Text Question 2.8 Question Hep Suppose that an individual is risk averse and has to choose between $8 with certainty and a risky option with two equally likely outcomes: $8-x and $8+x U(Wealth) Use a graph (or math) to show that this person's risk premium is smaller, the smaller x is (the less variable the gamble is) The risk-averse individual's utility function is ilustrated in the figure to the right along with expected wealth and expected utility when x-xo and when x where xo Ex U(8) 1.) Using the line drawing tool, indicate risk premium when x Label this Premiumo Label this 2) Using the line drawing tool, indicate risk premum when x· Premium Carefully follow the instructions above, and only draw the required objects The risk premium when x=x0 is x4 Wealth,$ 1 than when x-x1 nd) larger smaller Click to select your answer(s) and then click Check Answer so Clear All All parts showing

Explanation / Answer

The risk premium for x=x0 and x=x1 are marked on the graph. The risk premium when x=x0 is larger than when x=x1

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