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Problem 6 Mr. Jones has a utility function u = m0.5. His initial wealth is m, to invest some amount q S mo in a risky project with the return a return of 1₂ = -0.5 in a bad state. The probability of the good state is p = 0.8 and the probability of the bad state is p = 0.2. a) What is the expected value of this investment? b) What is the expected utility of this investment? 1000. He is considering = 0.2 in a good state and

Problem 6 Mr. Jones has a utility function u = m0.5. His initial wealth is m, to invest some amount q S mo in a risky project with the return a return of 1₂ = -0.5 in a bad state. The probability of the good state is p = 0.8 and the probability of the bad state is p = 0.2. a) What is the expected value of this investment? b) What is the expected utility of this investment? 1000. He is considering = 0.2 in a good state and

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
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Problem 6 = Mr. Jones has a utility function u= m0.5. His initial wealth is mo= 1000. He is considering to invest some amount q Smo in a risky project with the return 0.2 in a good state and a return of r=-0.5 in a bad state. The probability of the good state is p = 0.8 and the probability of the bad state is pp = 0.2. a) What is the expected value of this investment? b) What is the expected utility of this investment?
Transcribed Image Text:Problem 6 = Mr. Jones has a utility function u= m0.5. His initial wealth is mo= 1000. He is considering to invest some amount q Smo in a risky project with the return 0.2 in a good state and a return of r=-0.5 in a bad state. The probability of the good state is p = 0.8 and the probability of the bad state is pp = 0.2. a) What is the expected value of this investment? b) What is the expected utility of this investment?
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