Question
a) A retired persons income comes from earnings on her savings of 200,000. The table below shows how she values different levels of income. Income
a) A retired persons income comes from earnings on her savings of 200,000. The table below shows how she values different levels of income. Income Total Utility 5,000 12 10,000 22 15,000 30 20,000 36 25,000 40 30,000 42 (i) Describe, using first and second derivatives, her attitude toward risk? Briefly explain. (10 marks) (ii) She is currently earning 10% on her 200,000 in a risk free investment. She has the choice of investing in a project that has a 40% probability of yielding a return of 30,000 return on her investment and a 60% probability of yielding $10,000 return on her investment. Will she be better off if she moved her 200,000 to the risky project? Explain.
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