Please answer question b

22 a) A retired person's 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 15,000 30 20,000 36 25,000 40 30,000 42 (i) Describe, using first and second derivatives, her attitude toward risk? Briefly explain. (10 marks) 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) b) Consider an investment with three possible cash flow outcomes: 100 will be received with probability 0.1. 50 will be received with probability 0.2. 10 will be received with probability 0.7. (1) What is the expected value and standard deviation of the cash flows? (10 marks) (ii) What would a risk-neutral person pay for the investment? (10 marks) (iii) An individual's utility function is u(y) = yl? where y is the cash flow. What would she pay for the investment? Explain any differences with your answer to (ii). (10 marks)