- Problem 3 Preferences towards Risk: Zach has $25,000 to invest in a new biotech firm. The firm is currently seeking U.S. Food and Drug Administration (FDA) approval for a new gene therapy for cancer. If the FDA approves the new therapy, the firm's value will quadruple so that Zach's initial investment of $25,000 will be worth $100,000. However, if the FDA does not approve the therapy, the firm will go bankrupt, and Zach will lose his entire investment. The FDA approves applications for new gene therapies only 30% of the time. a) Suppose that Zach does not know whether or not the FDA will approve the therapy, but he knows that 30% of the applications are approved. If Zach is risk-neutral, will he invest in the new company? b) Suppose now that Zach is risk averse. Can you tell, without ambiguity, whether or not he will invest in the new company? Explain by referring to one (or more) utility graphs.