Edwina, a commodities broker, has acquired an option tobuy 1,000 oz of gold at $50/oz. If she takes the option and ifCongress relaxes import quotas, she can sell the gold for$80/oz. If she takes the option and Congress does not relaxthe import quotas, however, the company will lose $10/oz. Edwina believes that there is a 50% chance that the governmentwill relax the quota. She also has the option of waiting untilCongress decides whether to relax the import quota. If sheadopts this strategy, however, there is a 70% chance that someother broker will have already taken the option.a If Edwina is risk-neutral, what should she do? b If Edwina’s utility function for a change x in her as-set position is given by u(x) (10,000 x)1/2, what should she do?

Edwina, a commodities broker, has acquired an option tobuy 1,000 oz of gold at $50/oz. If she takes the option and ifCongress relaxes import quotas, she can sell the gold for$80/oz. If she takes the option and Congress does not relaxthe import quotas, however, the company will lose $10/oz. Edwina believes that there is a 50% chance that the governmentwill relax the quota. She also has the option of waiting untilCongress decides whether to relax the import quota. If sheadopts this strategy, however, there is a 70% chance that someother broker will have already taken the option.a If Edwina is risk-neutral, what should she do? b If Edwina’s utility function for a change x in her as-set position is given by u(x) (10,000 x)1/2, what should she do?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter2: Mathematics For Microeconomics

Section: Chapter Questions

Problem 2.16P

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