Question
Suppose X has income of Rs.500. He wants to maximise his
expected benefit Z1/2 where Z is his money earned. He has two options, 1. Do not invest 2. Investment full amount in company A with payoff of 1500 with 50% probability and Rs.0 with 50% probability. What is the maximum expected benefit out of the two options?Solution
Expected benefits = Z1/2 When he does not invest, EB= (500)1/2 = 22.36 When he does invest in A, EB = ½ (1500)1/2 + ½ (0)1/2 = ½ (38.73) = 19.36 So, Max EB = 22.36
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