The Manager's Utility Function for Profit Is U $\pi$ )= 50 $\pi$

question 26

Multiple Choice

The manager's utility function for profit is U $\pi$ ) = 50 $\pi$ ,where $\pi$ is the dollar amount of profit.The manager is considering a risky decision with the four possible profit outcomes shown below.The manager makes the following subjective assessments about the probability of each profit outcome: What is the expected utility of profit?

• A)-2,500
• B)5,000
• C)15,000
• D)30,000
• E)100,000

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Definitions:

Spot Price

The existing market value at which an asset is available for immediate purchase or sale.

Futures Contract

An agreement in law to buy or sell a designated financial product or commodity at an agreed-upon price, to be fulfilled at a future time.

Arbitrage

The simultaneous purchase and sale of the same assets or commodities in different markets to take advantage of differing prices for the same asset.

Interest Rate Risk

The potential for an investment's value to change due to fluctuations in the general level of interest rates.