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Cindy lives in a remote area and has a long commute to her job. If the winter is mild, she gets to work easily and earns $900 a week. If the winter is severe, she frequently gets snowed in and earns only $300 a week. The probability of a severe winter is;t = 1/2. Cindy's Von-Neuman Morgenstern utility function is u(y) - ln(y), where y denotes income. For $p a week, she can buy a jeep that would get her to work more often in severe winters, allowing her to earn $500 rather than $300 a week. Compute Cindy's expected utilities with and without the jeep, and determine the maximum price p she will pay to buy the jeep.

Financial Management, Finance

  • Category:- Financial Management
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