What is the smallest amount for which he would sell the deal

Reference no: EM131524526

Question: Buying and selling prices for risky investments obviously are related to CEs. This problem, however, shows that the prices depend on exactly what is owned in the first place! Suppose that Peter Brown's utility for total wealth (A) can be represented by the utility function U(A) = ln(A). He currently has $1,000 in cash. A business deal of interest to him yields a reward of $100 with probability 0.5 and $0 with probability 0.5.

a. If he owns this business deal in addition to the $1,000, what is the smallest amount for which he would sell the deal?

b. Suppose he does not own the deal. What equation must be solved to find the greatest amount he would be willing to pay for the deal?

c. For part b, it turns out that the most he would pay is $48.75, which is not exactly the same as the answer in part a. Can you explain why the amounts are different?

d. (Extra credit for algebra hotshots.) Solve your equation in part b to verify the answer ($48.75) given in part c.

Reference no: EM131524526

Questions Cloud

Identify all of the stakeholders in the water crisis : Identify all of the stakeholders in the water crisis, and list specific steps the city leadership can take to improve their image and restore public trust.

Find the total wealth : A bettor with utility function U(x) = ln(x), where x is total wealth, has a choice between the following two alternatives.

Discuss the linear-plus-exponential utility function : Repeat Problem II with U(x) = 0:0003x 8:48e-x/2775. A utility function of this form is called linear-plus-exponential, because it contains both linear.

Right-now rapid delivery service : As a manager employed by Right-Now Rapid Delivery Service, you are responsible for pricing the services involving same-day deliveries.

What is the smallest amount for which he would sell the deal : Buying and selling prices for risky investments obviously are related to CEs. This problem, however, shows that the prices depend on exactly what is owned.

Which ratios measure a corporations liquidity : Which ratios measure a corporation's liquidity? What are some of the problems associated with using financial ratios?

Contractual provisions unfair or deceptive : (1) To what degree does the FTC have authority to question your business practices? (2) Are your clearly stated contractual provisions unfair or deceptive?

Describe what occurs when red blood cell is placed in water : Briefly describe what occurs when a red blood cell is placed in water (a hypotonic solution).

How could you intuitively explain such behavior : We discussed decreasing and constant risk aversion. Are there other possibilities? Think about this as you work through this problem.

User Account

All Pages