Use the following information to answer question. Ms. Jones is thinking of investing in a new project that will cost $1,000 to start. There are two ways to raise this $1,000. She can take out $1,000 from her own pocket or take out $500 and invite a friend to share the investment. The investment will generate the following revenues, depending on the outcome of the investment.

The revenue will be equally split between Ms. Jones and her friend if they share the project. It is estimated that the probabilities of states 1, 2, and 3 are 1/3, 1/3, and 1/3, respectively.

Ms. Jones has the utility function U = f(W) = W^1/2, and her initial wealth is

$1,000. Should she invest in the project? If so, should she invest alone? Use the original probability function to answer this question.

Transcribed Image Text:

Revenue State 1 $800 State 2 $1,000 State 3 $1,500