Consider a manufacturing firm with a production process that relies on some technology that is inherently random. In particular, in each month, the productivity of the firm generates a baseline level of net revenue equal to 350 (in thousands of dollars). However, the actual net revenues generated vary due to the variation in output caused by the production technology. The variation can be represented as a risky lottery, P , with the resulting changes in net reven
Consider a manufacturing firm with a production process that relies on some technology that is inherently random. In particular, in each month, the productivity of the firm generates a baseline level of net revenue equal to 350 (in thousands of dollars). However, the actual net revenues generated vary due to the variation in output caused by the production technology. The variation can be represented as a risky lottery, P , with the resulting changes in net revenue (in thousands of dollars) as the listed outcomes, given by
P= (.4, -50; .25, 10; .35, 50)
Now, suppose u(x)= x.2 is the utility
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