2. Suppose returns on an investment are 4% or 16%, each with probability 0.5 a. Suppose also that U(w) = log(w). calculate the expected utility of the investment (assume $1 investment).

Now suppose that U(w) = -exp(-w). calculate the expected utility of the investment (assume $1 investment).

Can we say that the investor with U(w) = log(w) will pay more for the investment than the investor with U(w) = -exp(-w). why or why not?

b. Now consider another investment that offers returns of 0% with probability 1/3 or 15% with probability 2/3. Howe does this investment differ from the first one?

Calculate the expected utility of this second investment for both the above investors (utility functions).

How have our answer to (a) changed? Why do you think this has occurred?