Perry the picker has stumbled across a piece of pottery in an antique shop. Because of its style, he believes it might be by Frog Woman, a famous Hopi artist. If he buys the pot for $3,000, he will be able to re-sell it for $4,500, provided it is a genuine Frog Woman pot. If it is not genuine, he will be forced to unload it for only $1,000. Perry estimates that there is a 2/3 chance the pot is genuine.

a. If Perry bases his decision on expected monetary value, should he buy the pot?

b. Perry’s utility depends on his wealth: Specifically, U=W1/4. Compute Perry’s utility at the possible levels of final wealth he might experience.

c. If Perry bases his decision to buy on expected utility, what should he do?

d. Suppose Perry spends a little bit too much time in the hotel bar, and buys the pot without doing the math first. At breakfast the next morning, Penny, another picker, notices the pot and decides to make an offer for it. What is the minimum Penny would have to offer to convince Perry to sell. (Remember—Perry still doesn’t know whether the pot is genuine; an offer from Penny removes all risk.)

e. What is Perry’s risk premium?