Virginia Tyson Is a Widow Whose Primary Income Is Provided

question 134

Essay

Virginia Tyson is a widow whose primary income is provided by earnings received from her husband's $200,000 estate. The table below shows the relationship between income and total utility for Virginia.
Income Total Utility
5,000 12
10,000 22
15,000 30
20,000 36
25,000 40
30,000 42
a. Construct the marginal utility table for Virginia. What is her attitude toward risk? Explain your answer including a description of the marginal utility for individuals whose risk preferences are different from Virginia's.
b. Virginia is currently earning 10% on her $200,000 in a riskless investment. Alternatively, she could invest in a project that has a 0.4 probability of yielding a $30,000 return on her investment and a 0.6 probability of paying $10,000. Should she alter her strategy and move her $200,000 to the more risky project?

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Definitions:

Device

A piece of equipment designed for a particular purpose, often electronic in nature.

Demand Instrument

A financial document that requires the payment of money immediately or on demand.

Time Of Payment

The specific period or date by which payment for goods or services received must be made.

Voidable Instrument

A financial document or contract that is valid but may be annulled by one or more of the parties to the contract.