Determine if this manager a risk seeker, risk neutral, or a risk averter. Explain your answer. If the manager’s objective was profit maximization regardless of risk (أي دون أخذ المخاطرة بعين الاعتبار), which product should the manager introduces? Explain your answer. Evaluate the risk associated per dollar of profit with each product, i.e. find the coefficient of variation for each project. If the manager’s objectives were utility maximization, which product should the manager introduce? (Hint: in this section, you can assume the same probability distribution indicated in the table above.)

Determine if this manager a risk seeker, risk neutral, or a risk averter. Explain your answer. If the manager’s objective was profit maximization regardless of risk (أي دون أخذ المخاطرة بعين الاعتبار), which product should the manager introduces? Explain your answer. Evaluate the risk associated per dollar of profit with each product, i.e. find the coefficient of variation for each project. If the manager’s objectives were utility maximization, which product should the manager introduce? (Hint: in this section, you can assume the same probability distribution indicated in the table above.)

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.1P

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Assume that someone has inherited 2,000 bottles of wine from a rich uncle. He or she intends to drink these bottles over the next 40 years. Suppose that this person’s utility function for wine is given by u(c(t)) = (c(t))0.5, where c(t) is each instant t consumption of bottles. Assume also this person discounts future consumption at the rate δ = 0.05. Hence this person’s goal is to maximize 0ʃ40 e–0.05tu(c(t))dt = 0ʃ40 e–0.05t(c(t))0.5dt. Let x(t) represent the number of bottle of wine remaining at time t, constrained by x(0) = 2,000, x(40) = 0 and dx(t)/dt = – c(t): the stock of remaining bottles at each instant t is decreased by the consumption of bottles at instant t. The current value Hamiltonian expression yields: H = e–0.05t(c(t))0.5 + λ(– c(t)) + x(t)(dλ/dt). This person’s wine consumption decreases at a continuous rate of ??? percent per year. The number of bottles being consumed in the 30th year is approximately ???
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State of the economy	Product 1	Product 2
Probability	Profit ($)	Probability	Profit ($)
Boom	0.2	50	0.2	30
Normal	0.5	20	0.4	20
Recession	0.3	0	0.4	10