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Jane has a jam exporting business with its main export market being the EU She plans to retire by selling her business

 Jane has a jam exporting business with its main export market being the EU. She plans to retire by selling her business. If the Brexit negotiations for her industry fail, she can se the business for £10,000. If the negotiations are successful, she can sell the business fa £160,000. She has estimated that the probability of a successful negotiation is 50%. She has a von Neumann-Morgenstern utility function equal to the square root of her total income (i.e. w1/2). • Calculate the expected wealth and the expected utility. Explain Jane's risk preference. Show this analysis in a diagram with the utility on the y-axis and wealth on the x-axis and explain. Jane gets an offer to sell her business now for £70,000. Discuss how she will respond to this offer. Explain how Jane will respond to the offer if she is risk neutral. How will she respond if her risk preference is such that her utility function is equal to the square of her total income (i.e. W?)?

Feb 07 2020 View more View Less

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