Scenario 5.6:
Consider the information in the table below, describing choices for a new doctor. The outcomes represent different macroeconomic environments, which the individual cannot predict.

-Refer to Scenario 5.6. The expected utility of income from research is:
A) u($275,000).
B) u($95,000).
C) [u($500,000) + u($50,000)]/2.
D) .1 u($500,000) + .9 u($50,000).
E) dependent on which outcome actually occurs.

Question

Scenario 5.6:
Consider the information in the table below, describing choices for a new doctor. The outcomes represent different macroeconomic environments, which the individual cannot predict.
 
-Refer to Scenario 5.6. The expected utility of income from research is:
A) u($275,000). 
B) u($95,000). 
C) [u($500,000) + u($50,000)]/2. 
D) .1 u($500,000) + .9 u($50,000). 
E) dependent on which outcome actually occurs.

Quizplus · Accepted Answer

The expected utility of income from research is a weighted average of the utilities of the possible outcomes, with the weights being the probabilities of each outcome. In this case, there is a 10% chance of a high-income outcome ($500,000) and a 90% chance of a low-income outcome ($50,000). So the expected utility of income from research is:

.1 u($500,000) + .9 u($50,000)

This is the highest expected utility of all the options, so D is the best choice.

Scenario 5.6: Consider the Information in the Table Below, Describing Choices for Choices