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?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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