Bill Owns an Export Business

question 15

Multiple Choice

Bill owns an export business.The expected profit from his business is $100,000 a year.For every 1% increase in the value of the Japanese yen relative to the dollar, its profits increase by $20,000.Bill plans to buy one of two firms.One is an import business which returns an expected profit of $70,000.For every 1% increase in the value of the Japanese yen relative to the dollar, the profits of this firm shrink by $5,000.The second is a safe domestic firm which is certain to yield him $70,000 a year.The two firms cost the same.If Bill is risk averse,

• A)he should buy the domestic firm.
• B)he should buy the import firm.
• C)he should buy half of each of these two firms.
• D)it doesn't matter which he buys.
• E)he should buy 80% of the domestic firm and 20% of the import firm.

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Definitions:

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