Buying and selling prices for risky investments obviously are related to certain equivalents. This problem, however, shows that the prices depend on exactly what is owned in the first place. Suppose that your utility for wealth (A) can be represented by the utility function u(A) = In [(A)] You currently have R1000 in cash. A business deal of interest to you yields a reward of R100 with probability 0,5 and RO with probability 0,5. 2.1 If you own this business deal in addition to the R1000, what is the smallest amount for which you would sell the deal? 2.2 Suppose you do not own the deal. Formulate an appropriate equation and solve with algebra to find the largest amount you would be willing to pay for the deal. 2.3 Explain why the amounts in 2.1 and 2.2 are slightly different.
Buying and selling prices for risky investments obviously are related to certain equivalents. This problem, however, shows that the prices depend on exactly what is owned in the first place. Suppose that your utility for wealth (A) can be represented by the utility function u(A) = In [(A)] You currently have R1000 in cash. A business deal of interest to you yields a reward of R100 with probability 0,5 and RO with probability 0,5. 2.1 If you own this business deal in addition to the R1000, what is the smallest amount for which you would sell the deal? 2.2 Suppose you do not own the deal. Formulate an appropriate equation and solve with algebra to find the largest amount you would be willing to pay for the deal. 2.3 Explain why the amounts in 2.1 and 2.2 are slightly different.
Chapter7: Uncertainty
Section: Chapter Questions
Problem 7.10P
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![Buying and selling prices for risky investments obviously are related to certain equivalents. This problem, however, shows
that the prices depend on exactly what is owned in the first place. Suppose that your utility for wealth (A) can be
represented by the utility function u(A) = In [(A)] You currently have R1000 in cash. A business deal of interest to you
yields a reward of R100 with probability 0,5 and RO with probability 0,5. 2.1 If you own this business deal in addition to
the R1000, what is the smallest amount for which you would sell the deal? 2.2 Suppose you do not own the deal.
Formulate an appropriate equation and solve with algebra to find the largest amount you would be willing to pay for the
deal. 2.3 Explain why the amounts in 2.1 and 2.2 are slightly different.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F39e8a8d7-a695-4321-a0d3-078e4bb67fce%2F88ae81bb-2479-4361-a1dd-4302a221851d%2Fi9fbm3i_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Buying and selling prices for risky investments obviously are related to certain equivalents. This problem, however, shows
that the prices depend on exactly what is owned in the first place. Suppose that your utility for wealth (A) can be
represented by the utility function u(A) = In [(A)] You currently have R1000 in cash. A business deal of interest to you
yields a reward of R100 with probability 0,5 and RO with probability 0,5. 2.1 If you own this business deal in addition to
the R1000, what is the smallest amount for which you would sell the deal? 2.2 Suppose you do not own the deal.
Formulate an appropriate equation and solve with algebra to find the largest amount you would be willing to pay for the
deal. 2.3 Explain why the amounts in 2.1 and 2.2 are slightly different.
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