3. Suppose the individual has a utility function In(c) where c is consumption and In(-) is the natural logarithm function (that is, logarithm with base e; which is a very popular utility function used...

Extracted text: 3. Suppose the individual has a utility function In(c) where c is consumption and In(-) is the natural logarithm function (that is, logarithm with base e; which is a very popular utility function used in both economics and finance research). Calculate the expected utility from each lottery. 4. Variance is frequently used measure of dispersion for the probability distribution of a random variable. Furthermore, variance is often seen as a measure of risk. What do you think this example is trying to show you?


Extracted text: Consider two lotteries. Lottery A is such that an individual receives a prize of 1 unit of a consumption good with 80% probability and 100 units of the consumption good with 20% probability. Lottery B presents the winner with a prize of 10 units of a consumption good with 99% probability and a prize of 1090 units of the consumption good with 1% probability.