Assume that you inherit a small business that in good years earns $10,000 net income but in bad years earns just $2,500. The probability of a good year is 60%.
a. Calculate the expected value and variance of the income.
b. Suppose you have a utility function of U(W)=√W and you have zero initial wealth. If someone offers to pay $6,500 (a guaranteed payment) in order to lease and run the business, should you take it?
c. Why might someone else make such an offer? Provide three reasons, one of which must refer explicitly to risk attitude?