2) Veronica is going to sell two vases to a dealer. She can sell each vase...

 

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2) Veronica is going to sell two vases to a dealer. She can sell each vase for $10. In order to bring her vases to the dealer, Veronica needs to take a bus. There is a 50% chance that all the vases carried on one bus trip will be broken during the trip and a 50% chance that none of the vases carried on one bus trip will be broken during the trip. A roundtrip bus ticket costs $1. Veronica's net income is given by the revenues from the sale of her vases minus the cost of her bus trip(s). 2a) How many trips would Veronica make if she were risk-neutral? 2b) Suppose that Veronica's utility from income is U(x) = 100 ln(10+x). What is the expected utility of net income when Veronica takes both vases on one bus trip? And when she makes two trips? What strategy is preferred? 2c) Would Veronica's preferred strategy change if the bus fare were increased to $3? 2) Veronica is going to sell two vases to a dealer. She can sell each vase for $10. In order to bring her vases to the dealer, Veronica needs to take a bus. There is a 50% chance that all the vases carried on one bus trip will be broken during the trip and a 50% chance that none of the vases carried on one bus trip will be broken during the trip. A roundtrip bus ticket costs $1. Veronica's net income is given by the revenues from the sale of her vases minus the cost of her bus trip(s). 2a) How many trips would Veronica make if she were risk-neutral? 2b) Suppose that Veronica's utility from income is U(x) = 100 ln(10+x). What is the expected utility of net income when Veronica takes both vases on one bus trip? And when she makes two trips? What strategy is preferred? 2c) Would Veronica's preferred strategy change if the bus fare were increased to $3?

Answer rating: 100% (QA)

2a If Veronica were riskneutral she would make only one trip This is because the expected value of her net income is the same whether she makes one tr... View the full answer