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Frances Gumm has an opportunity to invest $3,000 in a venture that has a 0.2 chance...

Frances Gumm has an opportunity to invest $3,000 in a venture that has a 0.2 chance of making nothing, a 0.3 chance of making $2,000, a 0.2 chance of making $4,000, and a 0.3 chance of making $6,000. Her utilities for each of the outcomes are 0 for $2,000, 35 for $4,000, and 40 for making $6,000. Draw Frances’s utility curve and advise her on making the investment.

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Answer #1

His wealth = $3000

His potential return from investment:

Return Utility Probability Probabilistic utility
0 0 0.2 0
2000 0 0.3 0
4000 35 0.2 7
6000 40 0.3 12
Total 19

Frances Gumm should make this investment only if the utility from $3000 is less than 19 (which is probabilistic utility from different outcomes of investment)

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