Suppose Martha earns an of income 400 Birr currently, and her utility function is given by: U(m) = 4m, where m represents income. She has two options: Option 1: to buy a share. If she is successful her income will be 700 Birr and if she is not successful her income will be 100 Birr. Option 2: to do nothing and keep on earning 400 Birr. Assuming that success and failure are equally likely, a) What would be her expected income if she buys the share? b) What would be her expected utility of buying the share? c) Would Martha buy the share? Why? and Is Martha risk averse, risk lover or risk neutral?

Suppose Martha earns an of income 400 Birr currently, and her utility function is given by: U(m) = 4m, where m represents income. She has two options: Option 1: to buy a share. If she is successful her income will be 700 Birr and if she is not successful her income will be 100 Birr. Option 2: to do nothing and keep on earning 400 Birr. Assuming that success and failure are equally likely, a) What would be her expected income if she buys the share? b) What would be her expected utility of buying the share? c) Would Martha buy the share? Why? and Is Martha risk averse, risk lover or risk neutral?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.8P

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