Assume an investor with the following utility function:

(a) Graph the investor’s utility function.

(b) Will this investor be willing to execute an investment project that requires an outlay of £2,000 and has an equal chance to be a complete loss or generate a cash flow with a PV of £5,000?

(c) What is the maximum amount the investor would agree to invest in a project with a cash flow with an equal probability: a PV of £1,000 or a PV of £10,000?

(d) Answer parts

(b) and

(c) graphically.

Transcribed Image Text:

PV () Utility -2,000 -600 -1,000 -150 0 0 1,000 80 2,000 150 3,000 210 4,000 250 5,000 280 10,000 340