You currently have $10,000 in total wealth and rate your current utility at 4.25. You are deciding if you should invest your money in your friend’s automotive restoration business. There is a 50% probability that you will double your money, in which case your total utility will be 6. There is a 50% probability that your friend’s business will fail meaning that you will lose the entire $10,000 and your total utility will be 2.5.

a. What is the expected utility of investing in your friend’s company?

b. If you are risk averse, should you take the gamble and invest in your friend’s company?

c. Would your answer to part (b) be different if there was a 75% chance that you would double your money by investing in your friend’s business?