(A) Construct a Decision Tree to Help the Investor Make

question 71

Essay

(A) Construct a decision tree to help the investor make his decision. Make sure to label all decision and chance nodes and include appropriate costs, payoffs and probabilities.
(B) What is the best choice for the investor? Why?
(C) Suppose that investor has an exponential utility function for final assets with a risk tolerance parameter equal to $60,000. Which investment opportunity will he prefer in this case? What is his certainty equivalent?

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Definitions:

Output Levels

Refers to the quantity of goods or services produced by a company or economy over a certain period.

Returns to Scale

The rate at which production output increases as a result of a proportional increase in all inputs.

Isoquants

Curves that represent combinations of different inputs that yield the same output, used in production theory to analyze input choices.

Inputs

The resources used in the production process to produce goods or services, including labor, materials, and capital.