The Giants are playing the Yankees in the World Series. According to the odds makers, there is a 60 percent probability that the Yankees will win. Martin can buy a company that makes Yankees t-shirts for $800. If the Yankees win, he will earn $400 net of his investment (in other words, the company will return $1,200). If the Yankees lose, he will lose $400 net of his investment (in other words, the company will return $400). What is the expected net gain from this investment? Suppose Martin starts out with $1,000, and that we can represent his preferences with an expected utility function, with the benefit function W(X) = 3,000 X - X2 (for X up to 1,500), where X measures dollars. Is Martin risk averse?
Will he buy the company?