Jeremy the Treasure Hunter went to an antique show last week and was interested in buying...

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Jeremy the Treasure Hunter went to an antique show last week and was interested in buying a piece of furniture with an asking price of $86,000. However, antique price is highly volatile with future value heavily depending on market conditions. The table below shows three scenarios of market conditions, values of this antique furniture, and their respective probabilities in one year. Market Condition Boom Transition Bust Value of the Antique Furniture $180,000 $70,000 $24,000 1. (1 point) What is the Expected Value of this antique furniture in one year? Probability 3. (2 points) What is the Certainty Equivalent of this risky purchase opportunity? 25% 50% 25% 2. (4 points) Assume log utility for Jeremy the Treasure Hunter. That is, his utility U is given by the function U = In(W), where W is the future value of the antique furniture. Should Jeremy buy this piece at the asking price? Ignore time value of money, i.e., assume discount rate at 0%. 4. (2 points) What is the highest price Jeremy would want to pay for this antique furniture? Is it higher or lower than the Expected Value in part 1? Explain why briefly. Jeremy the Treasure Hunter went to an antique show last week and was interested in buying a piece of furniture with an asking price of $86,000. However, antique price is highly volatile with future value heavily depending on market conditions. The table below shows three scenarios of market conditions, values of this antique furniture, and their respective probabilities in one year. Market Condition Boom Transition Bust Value of the Antique Furniture $180,000 $70,000 $24,000 1. (1 point) What is the Expected Value of this antique furniture in one year? Probability 3. (2 points) What is the Certainty Equivalent of this risky purchase opportunity? 25% 50% 25% 2. (4 points) Assume log utility for Jeremy the Treasure Hunter. That is, his utility U is given by the function U = In(W), where W is the future value of the antique furniture. Should Jeremy buy this piece at the asking price? Ignore time value of money, i.e., assume discount rate at 0%. 4. (2 points) What is the highest price Jeremy would want to pay for this antique furniture? Is it higher or lower than the Expected Value in part 1? Explain why briefly.

Answer rating: 100% (QA)

1 Expected Value The expected value of the antique furniture in one year is 98000 This is calculated by multiplying the value of each outcome by its p... View the full answer