Problem: Your friend wants to start making cookies. The project can either succeed or fail completely, with equally likely probabilities. The return of the project when it is successful would be $100. Failed project does not return anything. To start this project, a $36 of investment is needed.
This person is risk-averse and so is considering whether to invest in the project. Their utility function is represented by u(x)= sq root x . Assume they have no other savings or wealth.
1) What is the expected value of the project?
2) Will your friend invest in the project?
3) What is the reservation price of investment for your friend?
4) How much is your friend's risk premium?