Question
An investor has an opportunity to invest $10,000 in a venture that will pay $20,000 with proba- bility 0.6 and nothing with probability 0.4.
An investor has an opportunity to invest $10,000 in a venture that will pay $20,000 with proba- bility 0.6 and nothing with probability 0.4. The utility function of the investor is u(w) = 200w-w for total wealth values 0w 100 in thousands of dollars. (a) (10 pts) Plot this utility function. Describe the investor's risk attitude. (b) (15 pts) If the investor has total assets of $10,000, should he invest in the venture or not? What if the investor has total assets of $90,000? How does the answer relate to the investor's risk attitude?
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Macroeconomics Principles Applications and Tools
Authors: Arthur O'Sullivan, Steven Sheffrin, Stephen Perez
9th edition
978-0134089027, 134089022, 978-0134420684
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