Nama : Sutera Viollesy

NPM : C1A009055
Jurusan : Ekonomi Pembangunan
Tugas Teori Mikro II

15.4 Consider two lottries, A and B. With loterry A, there is a 0,90 chance that you receive a payoff
of $0 and 0,10 chance that you receive a payoff of $400. With lottery B, there is a 0,50 chance that
you receive a payoff of $30 and 0,50 chance that you receive a payoff of $50.
a) Verify that these two lottries have the same expected value but that lottery A has a bigger
variance than lottery B.
EVA = 0,90($0) + 0,10($400) = 40
EVB = 0,50($30) + 0,50($50) = 15 + 24 = 40

Payoff

Probability

$0

0,9

$400

Square
Deviation
(0 - 400)2 =
160000
2

0,1

Multiplied by Probability
0,90 (160000 ) = 144000

(400 - 400) = 0

0,1 ( 0 ) = 0

Variance

144000

Payoff

Probability

Square
Deviation

Multiplied by Probability

$30

0,5

(30 - 50)2 = 400

0,50 (400 ) = 200

$50

0,5

(50 - 50) = 0

0,5 ( 0 ) = 0

Variance

200

b) Suppose that your utility function is U =

.Compute the expected value from each lottery.
Which lottery has the higher expected utility? Why?
EUA = 0,90 (
EUA = 0,90 (

) + 0,10 (
) + 0,10 (

EUA = 0,90 (22,36) + 0,10 (30)

EUA = 20,124 + 3 = 23,124

)
)

EUB = 0,50 (
EUB = 0,50 (

) + 0,50 (
) + 0,50 (

EUB EUB = 0,50 (23,02) + 0,50( 23,45)

EUB = 11,51 + 11,725 = 23, 235
Lottery B has the higher expected utility .
c) Suppose that your utility function is U = I + 500 . Compute the expected utility from each lottery. If
you had this utility function, are you risk averse, risk neutral, or risk loving.
EUA = 0,90( 0 + 500) + 0,10 ( 400 + 500)
EUA = 0,90 (500 ) + 0,10 ( 900 )
EUA = 450 + 90 = 540

EUB = 0,50 ( 30 + 500) + 0,50 ( 50 + 500)

EUB = 0,50 (530) + 0,50 (550)
EUB = 265 + 275 = 540

This utility function for risk neutral.

d) Suppose that your utility function is U =( I + 500)2 . Compute the expected utility from each
lottery. If you had this utility function, are you risk averse, risk neutral, or risk loving.
EUA = 0,90 ( 0 + 500)2 + 0,10 ( 400 + 500)2
EUA = 0,90 (500)2 + 0,10 (900)2
EUA = 0,90 ( 250000) + 0,10 (810000)
EUA = 225000 + 81000 = 306000

EUB = 0,50 ( 30 + 500)2 + 0,50 ( 50 + 500)2

EUB = 0,50 (530)2 + 0,50 (550)2
EUB = 0,50 (280900) + 0,50 (302500)
EUB = 140450 + 151250 = 291700
This utility function for risk loving.

15.6 Suppose that your utility function is U = . Compute the risk premium of the two lotteries
described in Problem 4.
Pu(I1) + (1-p) U(I2) = U(PI1 + (1-P)I2 RP
0,90 ( ) + (0,10) (

)=

0,90(0) + 0,10 (20) =

2=

1,414 = 40 - RP
RP = 40 1,414 = 38,586
15.5 Sketch the graphs of the following utility functions as I varies over the range $0 to $100. Based
on these averse,risk neutral or risk loving :
Payoff (1) $ 10 Payoff (2) $100
a) U = 10I (1/8)I2
UA = 0,50(10(10) (1/8)102 ) + 0,50(10(100) (1/8)1002 )
UA = 50 12,5 + 500 1250 = -712,5
b) U = (1/8)I2
UB = 0,50 (1/8)102) + 0,50 ((1/8)1002 ) = 0,50(12,5) + 0,50(1250) = 6,25 + 625 = 631,25
c) U = Log (I + 1)
UC = 0,5 (Log (10 + 1)) + 0,5(Log (100 + 1)) = 0,5(1,04) + 0,5(2,004) = 0,52 + 1,002 = 1,522
d) U = 5I
UD = 0,5(5(10) + 0,5 (5(100) = 25 + 250 = 275