You are considering opening your own photography studio specializing in weddings and other events. You think that there is a 40% probability of your business being successful, at which point you will have $60,000 in wealth, and a 60% probability that your business will fail and you will lose everything. The relationship between your financial situation and your utility is as provided in the following table.

You’re planning to finance the new business with all of your current wealth of $20,000.

a. If your goal is to maximize your utility, should you open the business?
Another option is to bring aboard three investors. Instead of financing the business on your own, the four of you will evenly split the startup costs so that now you will contribute $5,000 of your $20,000 in wealth to start up the company. If the company is successful, you will add an additional $15,000 to your wealth. If the company fails, you are left with a total of $15,000 in wealth.

b. If your goal is to maximize your utility, should you open the business with the three partners?

c. Does the ability to spread the risk impact your decision about opening the business?

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Wealth $0 $15,000 $20,000 $30,000 $35,000 $60,000 Utility 0 4.1 5.8 7.3 8.5 9.6