Provide one example of an investment option for households. Then, analyze this option based on its liquidity, risk and expected rate of return (is it moderate, high or low?). Be sure to provide s short explanation for each.
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- Give 1 problem solving example of Expect Value Maximization and its solutions using this formula.a. Define Compensating Variation (CV) and Equivalent Variation and show how they are related. Which one is the appropriate measure of the "value of life" in a risky project? b. Define CV, 1¹2to be the compensating variation for a movement from state 1 to risky state 2 for individual ; If a worker might die in state 2 what we expect the value of CV 12to be infinite, so no risky project entailing the possibility of death would be undertaken. How do you resolve this apparent dilemma ?A farmer believes there is an equal chance that the next growing season will be abnormallyrainy. His expected return function has the formExpected return = 0.5lnYNR + 0.5lnYRwhere YNR and YR represent the farmer’s income in the states of “normal rain”and “rainy,” respectively.Suppose the farmer must choose between two crops that promise the following incomeprospects:Crop YNR YRMaize $14,000 $5,000Cotton $9,500 $7,500a) Which of the crops will he plant?b) Suppose the farmer can plant half his field with each crop. Would he choose to do so?Explain your result.c) What mix of Maize and Cotton would provide maximum expected utility to this farmer?d) Would Maize crop insurance, available to farmers who grow only Maize, which costs$2,000 and pays off $4,000 in the event of a rainy growing season, cause this farmer tochange what he plants?
- Describe the Decision Rule for Nonsimple Investments?Consider the lottery that assigns a probability T of obtaining a level of consumption CH and a probability 1-T of obtaining a low level of consumption c, with CH > C1. Consider an individual facing such a lottery with utility function u(c) that has the properties that more is better (that is, a strictly positive marginal utility of consumption at all levels of c) and diminishing marginal utility of consumption, u"(c) < 0. As usual, we are using the shorthand u'(c) consumption and u"(c) = " = dư ( to be the second derivative of the utility function (which is also the derivative of the first derivative of the utility function). du(c) for the first derivative of the utility function with respect to dc du(c) dc2 du' (c) dcWhat is the Decision Rule for Nonsimple Investments?
- Describe a decision your company has madewhen facing uncertainty. Compute the expectedcosts and benefits of the decision. Offer adviceon how to proceed. Compute the profit conse-quences of the advice.The application which provides a way of revising conditional probabilities by using available information and provisions for revising conditional probabilities with other information that is useful for management decision making is called? Select one: a. Bayes’ theorem. b. overinvolvement ratios. c. probability rules. d. empirical formula.Uz U3 U. Us 30 42 54 80 Income The consumer has $42 saved. This gives the consumer a utility of They consider an investment project where there is an 76% chance they lose $12 and 24% chance they win $38. This would give them a utility of . The consumer accept this investment. They consider another investment project that will give them an expected income of $60. The consumer + accept this investment. For this consumer to accept an investment project it must have an income equal to, or greater than $