Suppose Thabo has a utility function U(x)= lax, where x > 0 is the total wealth.
4.1 How would you classify Thabo’s attitude towards risk? 4.2 Assume that Thabo has R2000000 in wealth, and decides to become an oil prospector. He finds a tract of land for sale for R1800000, which will produce no return at all if no oil is found, or will yield FIS 000 000 of income if oil is found. Let p be the probability that oil is found. 42.1 Draw the two tree diagrams that result from the actions, “buy the land” ain’t “imt buy the land”. 12.2 Determine the probability p of finding oil that would make Thabo exactly indifferent between buying the land and not buying the land. (Hint: Use the certainty equivalent property.)