7-2 Homework Assignment

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Business Finance

Description

Complete the problems found in the attached Module Seven Homework Questions document.

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QSO 520 Module Seven Homework Questions 1. (P8-43) Jason Scott (see Problem 8-42) has decided to incorporate utility theory into his decision with his mortgage application. The following table describes Jason’s utility function: Monetary Value -$4800 -$2900 -$2400 -$1000 -$500 $0 $1900 $2400 $4800 Utility 0.00 0.10 0.12 0.15 0.19 0.21 0.26 0.30 1.00 (a) How can you best describe Jason’s attitude toward risk? Justify your answer. (b) Will the use of utilities affect Jason’s original decision in Problem 8-42?
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Explanation & Answer

Hello buddy, above is a solution to the assignment. Please go through it and let me know of any need for an adjustment or a clarification. Thank you
Buddy, here you have it all. Thank you

Second
month

First month
Probability
Status

Status
(P1)

Increases
Increases
Increases
Remains
Remains
Remains
Decreases
Decreases
Decreases

Total
Probability

Probability
(P2)

0.3
0.3
0.3
0.5
0.5
0.5
0.2
0.2
0.2

Increases
Remains
Decreases
Increases
Remains
Decreases
Increases
Remains
Decreases

(P1 x P2)
0.5
0.25
0.25
0.25
0.5
0.25
0.5
0.25
0.25

0.15
0.075
0.075
0.125
0.25
0.125
0.1
0.05
0.05
Total

Total
Cost
4,800
2,400
0
2,400
0
-2,400
0
-2,400
-4,800

Expected
Value
(Total
Probability X
Total Cost)
720
180
0
300
0
-300
0
-120
-240
540

$6,000

0
0.1
0.12
0.15
0.19
0.21
0.26
0.3
1

Monetary Value

Utility

Monetary
Value
($4,800)
($2,900)
($2,400)
($1,000)
($500)
$0
$1,900
$2,400
$4,800

$4,000

$2,000

$0
0

0.2

0.4

($2,000)

($4,000)

($6,000)

2. In the second strategy

Status
Probability
Value
Utility
Effective Utility
Increases
0.3
-2400
0.12
0.036
Remains
0.5
0
0.21
0.105
Decrease
0.2
2400
0.3
0.06
s
Fixed
500
0.19
0.19
Cost
Total Utility

0.391

3. Strategy 3
Month 1
Status

Month 2
Probability

Status

Probability

Total Probability

Status
Increases
Increases
Increases
Remains
Remains
Remains
Decrease
s
De...


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