Question: 1. We stated that to assess the risk tolerance value of R for the exponential utility function, we should find the greatest value of Y such that the decision maker is indifferent between receiving $0 or a 50-50 gamble with payoffs Y and -Y/2. Show why this assessment procedure works.
2. In the trade-off method for assessing utilities, consider the dollar amount X1 that makes you indifferent between gambles A1 and A2, and X2 that makes you indifferent between gambles B1 and B2. Show that U(X2) = 2U(X1). (Write out the equations that reflect indifference between the gambles.)