Mr Phiri has K10,000 in his account. He is considering investing in a project which has 70 % probability of earning a profit of K10,000 and a 30% probability of incurring a loss of K10,000. His utility at the moment is 20 utiles with the current K10,000. With K20, 000 his utility would be 25 utiles and with K0 his utility would be zero. a) What is the expected profit of the project? b) What is the expected marginal utility of the project? Is Mr Phiri likely to invest in the project? Mr Sinkala also has K10,000 from which he derives 20 utiles. However, Mr Phiri derives 15 utiles from the profit of K10,000. c) What is the expected marginal utility for Mr Sinkala? d) How can you describe Mr Phiri and Mr Sinkala in terms of their attitude towards risk?
Mr Phiri has K10,000 in his account. He is considering investing in a project which has 70 % probability of earning a profit of K10,000 and a 30% probability of incurring a loss of K10,000. His utility at the moment is 20 utiles with the current K10,000. With K20, 000 his utility would be 25 utiles and with K0 his utility would be zero. a) What is the expected profit of the project? b) What is the expected marginal utility of the project? Is Mr Phiri likely to invest in the project? Mr Sinkala also has K10,000 from which he derives 20 utiles. However, Mr Phiri derives 15 utiles from the profit of K10,000. c) What is the expected marginal utility for Mr Sinkala? d) How can you describe Mr Phiri and Mr Sinkala in terms of their attitude towards risk?
Managerial Economics: A Problem Solving Approach
5th Edition
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Chapter17: Making Decisions With Uncertainty
Section: Chapter Questions
Problem 17.1IP
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Mr Phiri has K10,000 in his account. He is considering investing in a project which
has 70 % probability of earning a profit of K10,000 and a 30% probability of incurring
a loss of K10,000. His utility at the moment is 20 utiles with the current K10,000.
With K20, 000 his utility would be 25 utiles and with K0 his utility would be zero.
a) What is the expected profit of the project?
b) What is the expected marginal utility of the project? Is Mr Phiri likely to invest
in the project?
Mr Sinkala also has K10,000 from which he derives 20 utiles. However, Mr Phiri
derives 15 utiles from the profit of K10,000.
c) What is the expected marginal utility for Mr Sinkala?
d) How can you describe Mr Phiri and Mr Sinkala in terms of their attitude
towards risk?
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