Maya's bracelet is worth $100. There is a 25% chance that it will be stolen from the locker room at the gym. Maya's utility function for money is U(W)= W². Maya's expected utility is: A)12,500. B)7,500. C)10,000. D)15,000.

Question

Quizplus · Accepted Answer

First, we need to calculate the expected value of Maya's bracelet:

Expected value = $100 x (1 - 0.25) = $75

Then, we can plug this value into Maya's utility function to calculate her expected utility:

U(W) = W^(1/2) x U1(P1 = 2)^(1/2) x U1(P0 = 0)

U($75) = $75^(1/2) x 1^(1/2) x 0^(1/2) = $75^(1/2) x 0 = 0

This means that Maya's expected utility is 0, regardless of whether she chooses to leave the bracelet in the locker room or take it with her.

Therefore, the best choice for Maya is to leave the bracelet in the locker room, as she will avoid the risk of losing it without sacrificing any expected utility.

Maya's Bracelet Is Worth $100