Thanksgiving is approaching. It’s a holiday in the US where lots of turkey dinners take place.
Al’s market is contemplating their turkey order for the holiday. Al feels that because of a recent rise in patriotism, that this may be a very high demand turkey year. He believes that there’s a 75% chance he could sell 200 turkeys. However, he also recognizes that times are tough and we seem to be in a jobless recovery and so he feels that there’s a 25% chance that he could sell just 100 turkeys. Al can sell a turkey for 25 per turkey. Any turkeys not sold to consumers by Al will be sold to Al’s brother in law (who owns a deli) to be processed into sliced turkey for use in deli-sandwiches. But Al would only receive the equivalent of 5 per turkey for such sales. It costs Al 10 to acquire and process each turkey (which is the same whether the turkey is sold to the consumer or to his brother in law).
Assume that Al is risk neutral and his utility function (U) is just a function of profits (Π) from selling turkeys (at least at this time of the year).
How many turkeys should Al purchase (given that he can only purchase 200 or 100)?
How would your answer change if Al was risk averse with a utility function (U) of U = Π0.5?
In the risk neutral situation, how much would a turkey demand expert’s advice be worth to Al if the expert could predict turkey demand with perfect certainty?
Al should purchase ________________ turkeys because ______________________
If Al were risk averse, he should purchase ___________turkeys because ________________
The turkey expert’s advice would be worth _______________ to Al