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You are a risk-neutral person whose net worth is $450,000. You are thinking about opening a donut franchise, which will require an initial investment of $150,000. If you go ahead, the probability is p1 that you will make $500,000, p2 that you will break even, and p3 that you will lose the entire investment. (Note: It is assumed that there are no other possibilities, so p1 + p2 + p3 = 1.)

(a) There are three possible outcomes. Calculate your net worth at each of them.

(b) Assume that p1 = 0.1, p2 = 0.4, and p3= 0.5. Use tabular form to express the probabilities of the various possible values of net worth as consequences of your two possible courses of action. (Each course of action should be a row in the table.) What is the best decision?

Microeconomics, Economics

  • Category:- Microeconomics
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