1. The problem statement, all variables and given/known data You are a risk-neutral individual whose net worth is $10,000 and you are thinking of opening a Donut Franchise. To open the franchise you must invest $5,000. If you buy the franchise, the probability is 1/3 that you will make $500,000, 1/3 that you will break even, and 1/3 that you will lose the entire investment. What would be your decision? In general, at what probabilities would you change your decision? 3. The attempt at a solution Without investing, my expected wealth is E(L1)=10,000*1=10,000. With investing, my expected wealth besides 10,000-5,000=5,000 of my initial wealth is E(L_2)=(500,000-5,000)*(1/3)+(5,000-5,000)*(1/3)+(0-5,000)*(1/3)=163,333.30. Therefore, the expected wealth from the franchise investment is higher than the initial wealth without gamble. But the decision of which decision is better depends entirely on the risk-taking propensities of the individual and which decision this person chooses. There is also another possible way of solving it, and I don't know which one is correct: With investing, my expected wealth is E(L_2)=(510,000-5,000)*(1/3)+(10,000-0)*(1/3)+(10,000-5,000)*(1/3)=173,333.30 Thanks a lot.