Let Michael be an EU maximizer with utility function u(x) = exp{x} and = 0.001. (For

Let Michael be an EU maximizer with utility function u(x) = −exp{−βx} and β = 0.001. (For this value of β, the values of expected utility in this problem will be in a natural scale.) Michael compares stocks of two mutual funds. The current price for each is $100 per share. Michael believes that in a year the price for the first stock will be on the average either 10% higher or 10% lower with equal probabilities, while for the second stock 10% up or down should be replaced by a slightly higher figure, say, 11%.

(a) Which mutual fund is “better” for Michael? Do we need to calculate something to answer this question?

(b) Now, assume that the second fund invites all people who buy 100 shares to a dinner valued at $k. Which k would make a difference?