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Posted on Jul 20, 2024

In the next few weeks, a large online retailer, Amazing, Inc. will decide whether or not to expand to a second headquarters. If they do

In the next few weeks, a large online retailer, Amazing, Inc. will decide whether or not to expand to a second headquarters. If they do so, the buildout will be completed by Function Construction and will be very profitable for this young publicly traded firm. If the expansion is approved, the value of Function's stock will rise from $10 to $15 per share. However, if the project is not approved, the value of the stock will fall to $5 per share. Tricia, who works as the primary physician for the CEO of Amazing, has learned that the project is more likely to be approved than is generally thought. Based on this (inside) information, She believes that there is a 75% chance that the project will be approved and only a 25% chance that it will not be approved. Let TA be Tricia's consumption if the project is approved and T N A be her consumption if the project is not approved. Her von NeumannMorgenstern utility function is (TA,TNA)=(0.75ln(TA))+(0.25ln(TNA)) u ( TA , TNA ) = ( 0.75 ln ( TA ) ) + ( 0.25 ln ( TNA ) ) . Tricia's total wealth is $50,000, all of which is invested in perfectly safe assets. Tricia is about to buy stock in Function Construction. (Note: Tricia's insider trading is illegal.)

1)Tricia's budget constraint for the contingent commodity bundles, TA and TNA , can be found by eliminating x from these two equations. This gives a budget constraint of 0.5TA+0.5TNA=$50,000 0.5 TA + 0.5 TNA = $ 50 , 000 . To decide how much stock to buy, Tricia simply maximizes her von NeumannMorgenstern utility function subject to her budget. When she does this, she finds that TA/TNA = ..........................

2)Tricia's optimal contingent commodity bundle is........... $ for TA and $ ...................for TNA . To aquire this contingent commodity bundle, Tricia must buy.................... shares of stock in Function Construction.

Part 1 (1 point) Feedback See Hint of Tricia buys x shares of stock, and if the expansion is approved, she will make a profit of $5 per share. This means that the amount she can consume, contingent on the expansion being approved is TA = $50,000 + 5x. If she buys x shares of stock and the expansion is not approved, she will take a loss of $ per share. In this case, the amount that she will be able to consume contingent on the expansion not being approved, is $50,000 Part 2 (0.5 point) Feedback See Hint Tricia's budget constraint for the contingent commodity bundles, T and TNA, can be found by eliminating x from these two equations. This gives a budget constraint of O.ST A + 0.5T na = $50,000. To decide how much stock to buy, Tricia simply maximizes her von TA Neumann-Morgenstern utility function subject to her budget. When she does this, she finds that Tv Part 3 (1.5 points) Feedback See Hint for TNA. To aquire this contingent Tricia's optimal contingent commodity bundle is $ commodity bundle, Tricia must buy for TA and $ shares of stock in Function Construction, 01 Question (3 points) See page 225 In the next few weeks, a large online retailer, Amazing, Inc. will decide whether or not to expand to a second headquarters. If they do so, the buildout will be completed by Function Construction and will be very profitable for this young publidy traded firm. If the expansion is approved, the value of Function's stock will rise from $10 to $15 per share. However, if the project is not approved, the value of the stock will fall to $5 per share. Tricia, who works as the primary physician for the CEO of Amazing. has learned that the project is more likely to be approved than is generally thought. Based on this (inside) information, She believes that there is a 75% chance that the project will be approved and only a 25% chance that it will not be approved Let T be Tricia's consumption if the project is approved and Ty, be her consumption if the project is not approved. Her von Neumann-Morgenstern utility function is u(TX.Tv) = (0.75 x In(T) + (0.25 x In(Tv.)). Tricia's total wealth is $50,000, all of which is invested in perfectly safe assets. Tricia is about to buy stock in Function Construction. (Note: Tricia's insider trading is illegal.) Part 1 (1 point) Feedback See Hint of Tricia buys x shares of stock, and if the expansion is approved, she will make a profit of $5 per share. This means that the amount she can consume, contingent on the expansion being approved is TA = $50,000 + 5x. If she buys x shares of stock and the expansion is not approved, she will take a loss of $ per share. In this case, the amount that she will be able to consume contingent on the expansion not being approved, is $50,000 Part 2 (0.5 point) Feedback See Hint Tricia's budget constraint for the contingent commodity bundles, T and TNA, can be found by eliminating x from these two equations. This gives a budget constraint of O.ST A + 0.5T na = $50,000. To decide how much stock to buy, Tricia simply maximizes her von TA Neumann-Morgenstern utility function subject to her budget. When she does this, she finds that Tv Part 3 (1.5 points) Feedback See Hint for TNA. To aquire this contingent Tricia's optimal contingent commodity bundle is $ commodity bundle, Tricia must buy for TA and $ shares of stock in Function Construction, 01 Question (3 points) See page 225 In the next few weeks, a large online retailer, Amazing, Inc. will decide whether or not to expand to a second headquarters. If they do so, the buildout will be completed by Function Construction and will be very profitable for this young publidy traded firm. If the expansion is approved, the value of Function's stock will rise from $10 to $15 per share. However, if the project is not approved, the value of the stock will fall to $5 per share. Tricia, who works as the primary physician for the CEO of Amazing. has learned that the project is more likely to be approved than is generally thought. Based on this (inside) information, She believes that there is a 75% chance that the project will be approved and only a 25% chance that it will not be approved Let T be Tricia's consumption if the project is approved and Ty, be her consumption if the project is not approved. Her von Neumann-Morgenstern utility function is u(TX.Tv) = (0.75 x In(T) + (0.25 x In(Tv.)). Tricia's total wealth is $50,000, all of which is invested in perfectly safe assets. Tricia is about to buy stock in Function Construction. (Note: Tricia's insider trading is illegal.)