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 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 _______.
The manager receives an offer from another party to buy the rights to the risky project described above. This party offers the manager $3,200, which the manager believes will be paid with certainty.
e. The utility of $3,200 is __________.
f. Comparing the utility of $3,200 with the expected utility of the risky project, what should the manager do if the manager wishes maximize expected utility of profit? Explain.
g. Is your decision in f. consistent with the manager’s attitude toward risk as it is reflected by the utility function for profit? Explain.
h. Is the decision consistent with the mean-variance rules for decision making under risk? Explain.