Question

a) A retired person’s income comes from earnings on her savings of £200,000. The table below shows how she values different levels of income.

Income Total Utility
5,000 12
10,000 22
15,000 30
20,000 36
25,000 40
30,000 42

(i) Describe, using first and second derivatives, her attitude toward risk? Briefly explain.

(ii) She is currently earning 10% on her £200,000 in a risk free investment. She has the choice of investing in a project that has a 40% probability of yielding a return of £30,000 return on her investment and a 60% probability of yielding $10,000 return on her investment. Will she be better off if she moved her £200,000 to the risky project? Explain.

Answer 1

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