Wildcat co. has to decide whether or not to drill and oil well. it has $100 current income. drilling would cost $100; if oil were struck, the company would receive $200 for the oil. if the field is dry, nothing is recovered.(a) suppose wildcat’s utility function is u=y where y is income. suppose the probability of striking oil is 0.6. should wildcat drill? at what probability would wildcat be just indifferent between drilling or not? (b) now suppose the utility function is u=2y1/2. is wildcat risk adverse? using this function, answer question () suppose for $20, wildcat could run a test that would determine for certain whether the field is wet or dry. the probability of a positive test is 0.6. would the wildcat with the utility as in (a) do the test? (assume that if the field is wet, they can borrow at zero interest the extra $20 needed to drill– to be repaid immediately.) what is the maximum amount wildcat would pay for the test? (d) answer (c) using u=2y1/2.. for which utility function does the company value the test higher?

offer an explanation for your answer.