Mary runs her own small business, and has a utility function for assets of:
U(A) = 22A - .07A²‚ for all 0≤ A ≤ 100, where A denotes total assets in thousands of dollars.
(a) Describe Mary's attitude toward risk.
(b) Assume that Mary's current asset holding are $20,000. Should she accept a business opportunity that has a probability of 0.55 leading to a net profit of $15,000 and a probability of 0.45 leading to a net loss of $15,000?
(c) Assume that Mary's assets are $85,000 instead. Should she now accept the same offer?
(d) Comment on the results of the previous two questions.

Question

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The Answer of Mary runs her own small business, and has a utility function for assets of: U(A) = 22A - .07A²‚ for all 0≤ A ≤ 100, where A denotes total assets in thousands of dollars. (a) Describe Mary's attitude toward risk. (b) Assume that Mary's current asset holding are $20,000. Should she accept a business opportunity that has a probability of 0.55 leading to a net profit of $15,000 and a probability of 0.45 leading to a net loss of $15,000? (c) Assume that Mary's assets are $85,000 instead. Should she now accept the same offer? (d) Comment on the results of the previous two questions.

Mary Runs Her Own Small Business, and Has a Utility