Question

A manager expresses indifference between a certain profit of $5,000 and a venture with a 70% chance of making $10,000 and a 30% chance of making nothing. If the manager's utility-scale is set at 1 utile for $0. and 100 utiles for $10,000. If the manager is indifferent between a venture that has a 60% chance of making $10,000 and a 40% chance of making $1,000, and a sure investment that yields $5,000. Find the value of $1,000 in utiles for this manager.

Answer 1

Calculation of Venture Profit

certain profit of $5,000

1 70% chance of making $10,000

2 30% chance of making nothing

utility-scale is set at 1 utile for $0

100 utiles for $10,000

60% chance of making $10,000

40% chance of making $1,000

sure investment that yields $5,000

Find the value of $1,000 in utiles for this manager.

for value of $1,000 utiles calcution profit chance of 60% is $10000 and 40% is $1000

pure certainty model

60 % 10000

40% 1000

1 utiles

its chance to value of $1,000 in utiles is 1.5