Pedro's utility of wealth is 6 units for $10,000 and 10 units for $20,000. A friend gave him a lottery ticket for his birthday. The ticket won, giving him either $10,000 with probability 0.5 or $20,000 with probability 0.5. Pedro's expected utility from the lottery ticket is
A) between 6 and 8 units.
B) equal to 8 units.
C) between 8 and 10 units.
D) equal to 10 units.

Question

Quizplus · Accepted Answer

Pedro's expected utility is calculated as the weighted average of the utilities of the possible outcomes: (0.5 * 6) + (0.5 * 10) = 3 + 5 = 8 units.

Pedro's Utility of Wealth Is 6 Units for $10,000 and 10