1. George maximizes expected utility and he has a von-Neumann-Morgenstern utility function u (c) = √c. He has an initial wealth of $1,000. He finds an investment opportunity. The project has a startup cost of $1000, and a 9% chance of success. If the project succeeds, the payoff is $100,000; if it fails, its payoff is $0. (a) Would George invest in this project? (b) Suppose George has an initial wealth of $100, 000 instead of $1,000. Would he invest in this project? (c) Comparing your answers in parts (a) and (b), how does George's risk appetite change? Why?
1. George maximizes expected utility and he has a von-Neumann-Morgenstern utility function u (c) = √c. He has an initial wealth of $1,000. He finds an investment opportunity. The project has a startup cost of $1000, and a 9% chance of success. If the project succeeds, the payoff is $100,000; if it fails, its payoff is $0. (a) Would George invest in this project? (b) Suppose George has an initial wealth of $100, 000 instead of $1,000. Would he invest in this project? (c) Comparing your answers in parts (a) and (b), how does George's risk appetite change? Why?
Chapter7: Uncertainty
Section: Chapter Questions
Problem 7.8P
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![1. George maximizes expected utility and he has a von-Neumann-Morgenstern utility function u (c) =
√e. He has an initial wealth of $1,000. He finds an investment opportunity. The project has a
startup cost of $1000, and a 9% chance of success. If the project succeeds, the payoff is $100,000;
if it fails, its payoff is $0.
(a) Would George invest in this project?
(b) Suppose George has an initial wealth of $100, 000 instead of $1,000. Would he invest in this
project?
(c) Comparing your answers in parts (a) and (b), how does George's risk appetite change? Why?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F57404a58-1598-4ab2-aa82-4e7b001ce8eb%2F8864798c-7b56-4b36-a875-d355846be6ea%2Fhiqptsn_processed.png&w=3840&q=75)
Transcribed Image Text:1. George maximizes expected utility and he has a von-Neumann-Morgenstern utility function u (c) =
√e. He has an initial wealth of $1,000. He finds an investment opportunity. The project has a
startup cost of $1000, and a 9% chance of success. If the project succeeds, the payoff is $100,000;
if it fails, its payoff is $0.
(a) Would George invest in this project?
(b) Suppose George has an initial wealth of $100, 000 instead of $1,000. Would he invest in this
project?
(c) Comparing your answers in parts (a) and (b), how does George's risk appetite change? Why?
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