Brandon's certainty equivalent given the information in problem 29 is
A) 45.75
B) 33.06
C) 30.5
D) 61

Question

Quizplus · Accepted Answer

Brandon's utility function is u(x) = √x. His expected utility from the gamble is 
0.5√25,000 + 0.5√10,000 = 158.11.
To find his certainty equivalent, we need to find what amount of money guarantees him the same utility as the probability-weighted average utility of the gamble. We solve for x in the equation √x = 158.11:
x = (158.11)^2 = 24,983.12
Therefore, Brandon's certainty equivalent is $24,983.12, which is closest to option B ($33.06) in the given answer choices.

Brandon's Certainty Equivalent Given the Information in Problem 29 Is