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Question: STRENLAR, PART III

Consider once again Fred Wallace's decision in the Strenlar case study at the end of Chapter 4. What if Fred is risk-averse? Assume that Fred's attitude toward risk in this case can be adequately modeled using an exponential utility function in which the utility is calculated for net present value. Thus,

U(NPV) = 1 - e-NVP/R

1. Check the sensitivity of Fred's decision to his risk tolerance, R. What is the critical R value for which his optimal decision changes? What advice can you give to Fred?

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M92333225

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