Final-Fall 2024-Decision and Risk Analysis [Compatibility Mode] - Word
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Question #4 (10 Marks)
Utilizing the decision tree below, using an exponential utility function, which is given by;
$U(x)=1-e^{-x/R}$, Where R is the Risk Tolerance $ 100,000, calculate the expected utility (EU),
Certainty equivalent (CE), and a risk premium (RP) for the decision maker. Is this decision maker risk
lover, risk-neutral, or risk averse?
Do not bid
Profit in Thousands S
0
Bil $115,000
No Competition
15
Bid wins
15
Bid Loves
-5
Bil $120,000
No Competition
20
Bid $125,000
Bid wins
20
Bid Loses
-5
The Decision Tree
No Competition
25
25
5
b) If a contractor is willing to give up 3 of the product (x) in exchange for 1 of the product (y), what is his
marginal rate of substitution at that point?
c) Wat is the slope of the indifference curve at the utility maximizing point? And what slopes are equal at
the tangracy point.
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1:34 PM
1/28/2025