Question
Say a person has 90,000 to spend and will either put the money into savings bonds or real estate. Whether economic conditions are good or
Say a person has 90,000 to spend and will either put the money into savings bonds or real estate.
Whether economic conditions are good or bad the savings bond will return the investor $1000.
If economic conditions are good the real estate will return $10,000 but if conditions are bad the real estate will yield a loss of $2000 for the investor.
Economic Conditions | ||
Investment | Good | Bad |
Bonds | 1,000 | 1,000 |
Real Estate | 10,000 | -2,000 |
Show you calculations and answers for the following questions typed neatly.
1 what probability of good economic conditions would mean savings bond and the real estate have the same expected value?
2 now say the probability of good economic conditions is .6. What is the expected value of each alternative and which alternative would be chosen using the expected value approach? What is the EVPI?
3 again say the probability of good economic conditions is .6. Since the utility for $10,000 is 10 and the utility for minus $2000 is 0 in our course, what would utility have to be for the $1000 and have the investor pick the savings bond under the expected utility approach? Does this mean the investor is risk averse or risk taker?
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