Suppose the manager of a firm has a utility function for profit of U(?) = 20 ln(?), where ? is the dollar amount of profit. The manager is considering a risky project with the following profit payoffs and probabilities:

a. Calculate the expected profit.b. Calculate the expected utility of profit.c. Fill in the blanks in the table showing the marginal utility of an additional $1,000 of profit.d. The manager is risk_________ because the marginal utility of profit is __________.

Transcribed Image Text:

Profit Marginal Probability outcome utility of profit 0.05 $1,000 0.15 2,000 0.30 3,000 0.50 4,000