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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
- 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 |
- Describe, using first and second derivatives, her attitude toward risk? Briefly explain.
(10 marks)
- 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.
(10 marks)
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