Consider an Advertising Company Which Has to Decide on Investing

Essay

Consider an advertising company which has to decide on investing with the current team that has a 50 percent chance of earning a net profit of $35,000 and a 50 percent chance of losing $17,500 invested. a. Write the equation for the exponential function that approximates the advertising company's utility function.
b. Plot the exponential utility function for this advertising company for x values between -30,000 and 45,000. Is the management for the advertising company risk seeking, risk neutral, or risk averse?
c. Suppose the management would like to invest more on marketing and actually be willing to make an investment that has a 50 percent chance of earning $50,000 and a 50 percent chance of losing $25,000. Plot the exponential function that approximates this utility function and compare it to the utility function from part b. Is the management becoming more risk seeking or more risk averse?