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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

  1. 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

  1. Describe, using first and second derivatives, her attitude toward risk? Briefly explain.

(10 marks)

  1. 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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