Pete's expected utility function is pc^1/2₁ + (1 -p)c^1/2₂, where p is the probability that he consumes c₁ and 1 - p is the probability that he consumes c₂.Pete is offered a choice between getting a sure payment of $Z or a lottery in which he receives $1,600 with probability .80 or $14,400 with probability .20.Pete will choose the sure payment if A)Z 3,136 and the lottery if Z 8,768 and the lottery if Z 14,400 and the lottery if Z 2,368 and the lottery if Z 4,160 and the lottery if Z

Question

Pete's expected utility function is pc^1/2₁ + (1 -p)c^1/2₂, where p is the probability that he consumes c₁ and 1 - p is the probability that he consumes c₂.Pete is offered a choice between getting a sure payment of $Z or a lottery in which he receives $1,600 with probability .80 or $14,400 with probability .20.Pete will choose the sure payment if A)Z > 3,136 and the lottery if Z < 3,136. B)Z > 8,768 and the lottery if Z < 8,768. C)Z > 14,400 and the lottery if Z < 14,400. D)Z > 2,368 and the lottery if Z < 2,368. E)Z > 4,160 and the lottery if Z < 4,160.

Quizplus · Accepted Answer

The expected value of the lottery is calculated as (0.80 * $1,600) + (0.20 * $14,400) = $1,280 + $2,880 = $3,160. Pete will choose the sure payment if it is greater than the expected value of the lottery, which is $3,160, and the lottery if the sure payment is less than $3,160.

Pete's Expected Utility Function Is Pc1/21 + (1 -P)c1/22, Where

Pete's Expected Utility Function Is Pc^1/2₁ + (1 -P)c^1/2₂, Where