Question

In: Economics

CHOICE UNDER UNCERTAINTY III. Consider an individual with an initial wealth of $50,000. They have the...

CHOICE UNDER UNCERTAINTY

III. Consider an individual with an initial wealth of $50,000. They have the opportunity to

invest in a project where they may win $40,000 with a probability of 0.8 and may lose

$40,000 with a probability of 0.2. There are no out-of-pocket costs for investing in the

project but if they lose then that will be deducted from their initial wealth.

1. What would be the individual’s expected wealth if they participate in the investment

project?

2. If the individual’s preference towards risk are defined by the function: ? = √?, would

they invest in the project? (Hint: Calculate the expected utility of wealth if the individual

participates in the investment and compare it with the utility of their current wealth)

Solutions

Expert Solution

Solution is provided below from page 1 to 3

Rahul Sunny answered 1 year ago
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