08 Question |See page 227 The certainty equivalentof a lottery is the amount of money you would have to be given with certainty to be just as well off with that lottery. Suppose that your von...

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Extracted text: 08 Question |See page 227 The certainty equivalentof a lottery is the amount of money you would have to be given with certainty to be just as well off with that lottery. Suppose that your von Neumann-Morgenstern utility function over lotteries that gives you an amount Sr ifevent 1 happens and Sy if event 1 does not happen is u(ar, y, m) = mz + (1 – r)y, where r is the probability that event 1 happens and (1 – m) is the probability that event 1 does not happen. 1st attempt Part 1 O See Hint Suppose = 0.5 and you play a lottery that pays $2,500 if event 1 happens and $100if event 1 does not happen. What is your expected utility from this lottery? 30 Part 2 O See Hint Ifyou were sure to receive $4,900, what would your expected utility be? 70 Part 3 O See Hint Given this utility function and T = 0.5, whichof the following options gives a general formula for the certainty equivalent of a lottery that gives you Sz if event 1 happens and Syif event 1 does not happen? O Choose one: O A (0.5a +0.5y | O B. VE+ Vỹ • D. (0.5/E + 0.5, O E. 0.5z + 0.5y