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Calculating expected profit and utility values

An individual is considering two investment projects. Project A will return a zero profit if conditions are poor, a profit of $4 if conditions are good, and a profit of $8 if conditions are excellent. Project B will return a profit of $2 if conditions are poor. a profit of $3 if conditions are good, and a profit of $4 if conditions are excellent. The probability distribution of conditions is as follows:

Conditions: Poor Good Excellent
Probability 40% 50% 10%

a) Using excel, find out the expected value of each project and identify the preferred project according to this criterion.

b) Assume that the individual's utility function for profit is U(X) = X -0.05X2. find out the expected utility of each project and identify the preferred project according to this criterion.

c) Is this individual risk averse, risk neutral, or risk seeking? Why?

 

Business Economics, Economics

  • Category:- Business Economics
  • Reference No.:- M927680

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