Consider an Advertising Company Which Has to Decide on Investing

question 45

Essay

Consider an advertising company which has to decide on investing with the current team that has a 50 percent chance of earning a net profit of $35,000 and a 50 percent chance of losing $17,500 invested. a. Write the equation for the exponential function that approximates the advertising company's utility function.
b. Plot the exponential utility function for this advertising company for x values between -30,000 and 45,000. Is the management for the advertising company risk seeking, risk neutral, or risk averse?
c. Suppose the management would like to invest more on marketing and actually be willing to make an investment that has a 50 percent chance of earning $50,000 and a 50 percent chance of losing $25,000. Plot the exponential function that approximates this utility function and compare it to the utility function from part b. Is the management becoming more risk seeking or more risk averse?

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Definitions:

Unconditioned Response

A natural, automatic action or feeling that occurs in response to a stimulus without prior learning or conditioning.

Punisher

An entity or stimulus that decreases the likelihood of a behavior recurring by administering an adverse response or outcome.

Negative Reinforcer

A stimulus whose removal after a behavior increases the likelihood of that behavior occurring again in the future.

Shaping

A technique in behavioral psychology involving the successive reinforcement of behaviors that approximate the desired behavior.