Question: A decision maker with a logarithmic w-curve owns a deal that provides a 50/50 chance of receiving either $ 100 or 0. His certain equivalent for this deal is $30.
a. What is the value of his initial wealth, w?
b. If a decision maker with an exponential w-curve had the same certain equivalent for this deal, what is the value of his risk tolerance?
c. Plot a sensitivity analysis of the certain equivalent to the initial wealth from w = $5 to w = $10,000.
d. What is the certain equivalent of the deal if the initial wealth is $1,000; $2,000; $4,000; $10,000?
e. Does the certain equivalent increase or decrease with wealth? Compare to an exponential decision maker.