An Individual Has a Utility of Money Function U =

question 38

Essay

An individual has a utility of money function U = 20 + 0.5M and considers two options:
Option 1: Invest $100,000 in a building plot,which will be sold for $150,000 if interest rates decrease or for $80,000 the interest rates do not change.
Option 2: Invest the same $100,000 in bonds,which will be worth $135,000 if interest rates decrease,and $100,000 if the interest rates remain the same.
The consensus among economic forecasters is that interest rates have an 80% chance of decreasing and 20% chance of remaining constant.
Which investment option will this individual select?

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Definitions:

Hypothesis

A proposed explanation for a phenomenon, made as a starting point for further investigation, which can be tested and falsified through experimentation and observation.

Ultrasonic Cries

Sounds emitted above the human hearing range, often used for communication or echolocation in various species.

Cricket Behavior

The range of actions and reactions of crickets in response to internal and external stimuli, including mating songs and territoriality.

Prediction

The act of forecasting or estimating a future event or trend based on current data or models.