Question

An individual with an income of 1000 is considering the purchase of a risky asset for $250. There is a 40% chance the asset will earn $1000 and a 60% chance it will be worthless.

a. Will the individual purchase this asset?

b. What is the cost of risk for this individual if the asset is purchased?

c. How much will the cost of risk be if a 2^nd identical person is brought in to help purchase the asset?

Assuming his Utility function is U=(the squareroot of I)

Please take note of the utility function. Thank you.

Answer 1

Solu Hon Accding to that Colec -from c data let u irdividual an income is lo00 hay ky asset of $250 and its yochance The assets we will eavn tolo00 and i607 chance tey are irdividu puvcha his asse En)=Cioo0t100o -2 s) o.yCloo0 - 25)*0-6= is0 No wed ith C 1000)-31.6 ard i Yisky ahet cuvrent CO.S 150 33-9 itis utilit from bing the aset greate is purchased an et hc Cost of individuat b NOw 2 )0.62 E (L) O.uCiooo They and i emain Unchanged to cuhen Cost of r /s ale pucha the bvougkt het p e aond dticae assets