Josh Lemer sa young MBA graduate student and his initial wealth is zero (i.e., weath w =0. He has an exponential utility function that can be

expressed as: u(w) = exp(-lambda w), with lambda =0.01.

The fact that wealth equal zero is immaterial with this utility function. In paricular, do not worry about terminal wealth being less than zero; all formulas still work)

Josh must decide whether to buy an asset for a price of P = $100. In a

month's time, the asset wil be worth $120, $110, or $90, each with probability 1/3. That is, the value the asset in a month is represented by

the random variable X = (120; 1/3;110;13:90: 1/3). Josh can also buy a

research report that will reveal with certainty whether the asset is worth $90, but will not provide any further information otherwise. Formally, the research report is a signal S that takes two values, b for "bad" and g for

"good" with Prob(S = b I X = $90) = 1 and Prob (S = g I X

*($110 or 120)) = 1. The research report is avaliable at a price of n

Question: the research reports costs nothing (i.e., r = 0), and the report

signals "good" (S=g), how much is the "expected profit" that Josh will make in one month?

A) 10.0

B) 12.5

C) 15.0

D)17.5

Continued from the previous question, which of the following is closest to the "fair" price of the research report for Josh? In other words, what is the price that Josh should pay for the research report that makes his expected utility indifferent between buying vs. not buying this research report?

A)3.06

B)4.25

C)2.41

D)3.79