Question

Please i need the answers to all parts,

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4. Jane has to transfer 50 eggs to her bakery from the store. She can put all of her eggs in a single basket, or she can split her load into two medium baskets. Each basket, regardless of size, has the same chance of falling and spoiling all of its contents. (a) If Jane is risk neutral, which mode of transport would she prefer? (b) If Jane is risk averse, which mode of transport would she prefer? (c) If Jane is risk seeking, which mode of transport would she prefer? d) Would the answer to (b) and (c) change if there were five baskets avail able? (e) Give an economic interpretation for the phrase: "Don't put all your eggs in one basket".

Answer 1

a) If Jane is risk neutral, she would be indifferent between both the medium of transports as the probability of each basket falling is same.

b) If Jane is risk averse, she would not like to take risk and will choose to split the load into two medium baskets.

c) If Jane is risk seeker, she would like to take risk and will pit all of her eggs in a single basket.

d) If five baskets were available, then the amswer to b would change as the risk averse person would like to reduce the risk of spoiling the eggs and would choose to split the load into 5 baskets.

There would be no change in the answer of c , as being risk seeker , Jane would carry all the eggs in one basket.

e) The phrase “ Don’t put all your eggs in one basket” means that one should not use all the resources it has in one place and should always have other options open , so that if one option is not working , the loss will be less and the person could use the remaining resources in other option.

For example, it is always advised to have a diversified protfolio when a person trades in stock market, so that if one stock price falls, the other stock price may rise and reduce the losses.