1. Suppose that a decision maker\'s utility as a function of her wealth, x, is g

Question

1. Suppose that a decision maker's utility as a function of her wealth, x, is given by U(x) - In (x-1000) (In is the natural logarithm of x). The decision maker now has $15,000 and two possible decisions. For decision 1, she loses $2,000 for certain. For decision 2, she loses $5,000 with probability 0.25, but gains $10,000 with probability 0.75. Which decision maximizes th expected utility of her net wealth? a.She should choose option 2. Her expected utility is 9.84 b.She should choose option 1. Her expected utility is 9.39. C. She should choose option 1. Her expected utility is 9.55. d. She is indifferent between the two choices. 1 points

Explanation / Answer

decision 1

E(X1) =
ln (15000 -2000-1000) = 9.392661

decision 2

E(X2) =
0.25 * ln (15000 - 5000-1000) + 0.75 * ln (15000 + 10000-1000)
= 9.84060

since 9.84 > 9.39266

we choose option 2 )

option A) is correct

Please rate

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.