Julia and Julia is a small, owner-operated bakery. The owner of Julia & Julia is considering two alternative investments, X and Y. There are four possible outcomes for each (1,2,3 and 4 for Investment X and A, B, C, D for Investment Y). Investment X Investment Y Outcome Payoff Payoff Probability 0.2 Outcome Probability 1 A 0.1 2 2 0.2 B 30 0.2 12 0.4 1 0.5 4 14 0.2 14 0.2 (a) To one decimal place (e.g. 3.5), what are the expected values of Investment X and of Investment Y? The expected value of X is The expected value of Y is Say the owner's utility function is given by U (Z) = VZ where U is the utility and Z is X or Y. (b) Is the owner risk averse? O Yes O No (c)Which investment will the owner choose? OInvestment X Investment Y

Julia and Julia is a small, owner-operated bakery. The owner of Julia & Julia is considering two alternative investments, X and Y. There are four possible outcomes for each (1,2,3 and 4 for Investment X and A, B, C, D for Investment Y). Investment X Investment Y Outcome Payoff Payoff Probability 0.2 Outcome Probability 1 A 0.1 2 2 0.2 B 30 0.2 12 0.4 1 0.5 4 14 0.2 14 0.2 (a) To one decimal place (e.g. 3.5), what are the expected values of Investment X and of Investment Y? The expected value of X is The expected value of Y is Say the owner's utility function is given by U (Z) = VZ where U is the utility and Z is X or Y. (b) Is the owner risk averse? O Yes O No (c)Which investment will the owner choose? OInvestment X Investment Y

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.8P

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