Maurice Tutor

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Category > Management Posted 17 Jan 2018 My Price 7.00

pharmaceutical company

 

14.    In attempting to quantify its attitude toward risk, top management of the pharmaceutical company has reported certainty equivalent values for a variety of 50–50 risks. These are summarized in the following table.

 

 

Outcome of 50–50 Risk

$200 and $0

 

Certainty  Equivalent

$ 50

$200 and $50

112

$50 and $0

13

$200 and $112

153

$112 and $50

70

$50 and $13

28

$112 and $13

50

 

For instance, the company’s CE for a 50–50 risk between $200 million and $0 is $50 million, and so on.

a.    Use these responses to determine utility values for each of the monetary values in the second column. (Hint: Set U($200) = 100 and U($0) = 0. Show that U($50) = 50, U($112) = 75, and so on.) Construct a utility graph by plotting points and drawing a smooth curve. (You may wish to check the utility values in Problem 13 against your curve.)

*b.  Consider the mathematical utility function U = 7.1 1y , where U is the utility value corresponding to monetary outcome y. Check that this function is an accurate description of the pharmaceutical company’s attitude toward risk. Is the company very risk averse?

Answers

Maurice Tutor
(5)
Status NEW Posted 17 Jan 2018 10:01 PM My Price 7.00

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