Donald Drumpf, a well-known property investor, attributes his great success (or lack thereof) to being totally indifferent to risk, and as a result being willing to invest in a commercial property development when timidity prevents other, lesser mortals from investing under the same circumstances. Although his current day job is keeping him reasonably busy, Drumpf has taken an interest in developing a new, 500-story luxury hotel in a particularly desirable site in Moscow, immediately opposite the Kremlin. The development has been shunned by other developers, for it is commonly believed that upon completion the market value of the hotel, while likely to be twenty percent greater than its costs over that period, could also turn out to be worth nothing to an investor, owing to its potential expropriation by a well-known but sketchy Kremlin resident. Drumpf regards these two alternatives as being true, but also believes that, owing to his close friendship with this resident, there is only a ten percent chance of expropriation when the hotel is completed.

a. If Drumpf's accountants estimate that completion costs would total 50, 000, 000.00, what conclusion would Drumpf (rationally) make about the hotel's average market value at completion?

a. Would Drumpf be happier if he received that average value with certainty rather than engaging in the risky hotel project?

b. If the friendly gnomes at Deutsche Bank offer to fully insure Drumpf against any potential loss from expropration, would he purchase it?