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
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Chapter7: Uncertainty
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Problem 7.8P
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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
Transcribed Image Text: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
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