Question: An individual has the following utility function: u(w) = w.5 where w = wealth.
a. Using expected utility, order the following prospects in terms of preference, from the most to the least preferred:
- P1(.8, 1,000, 600)
- P2(.7, 1,200, 600)
- P3(.5, 2,000, 300)
b. What is the certainty equivalent for prospect P2?
c. Without doing any calculations, would the certainty equivalent for prospect P1 be larger or smaller? Why?