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A bettor with utility function U(x) = ln(x), where x is total wealth, has a choice between the following two alternatives:
A. Win $ 10,000 with probability 0.2
Win $1000 with probability 0.8 B
B. Win $3000 with probability 0.9
Lose $2000 with probability 0.1
1. If the bettor currently has $2500, should he choose A or B?
2. Repeat a, assuming the bettor has $5000.
3. Repeat a, assuming the bettor has $10,000.
4. Do you think that this pattern of choices between A and B is reasonable? Why or why not?

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Answer

The answer and procedures of the exercise are attached in a microsoft word document.  

Explanation  

Please consider the data provided by the exercise. If you have any question please write me back. All the exercises are solved in a single sheet with the formulas indications.  

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