Problem:
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, 1000, 600)
P2(.7, 1200, 600)
P3(.5, 2000,300)
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?