-Dana's utility of wealth is 65 units at $3,000, 80 units at $5,000, and 95 units at $9,000. Starting from zero wealth, he must choose between options A and B. Option A gives him $5,000 for sure. Option B gives him $3,000 with probability 0.5 or $9,000 with probability 0.5. Dana will
A) choose option A.
B) choose option B.
C) be indifferent between option A and option B because they have the same risk.
D) be indifferent between option A and option B because they have the same expected utility.

Question

-Dana's utility of wealth is 65 units at $3,000, 80 units at $5,000, and 95 units at $9,000. Starting from zero wealth, he must choose between options A and B. Option A gives him $5,000 for sure. Option B gives him $3,000 with probability 0.5 or $9,000 with probability 0.5. Dana will
A) choose option A. 
B) choose option B. 
C) be indifferent between option A and option B because they have the same risk. 
D) be indifferent between option A and option B because they have the same expected utility.

Quizplus · Accepted Answer

Dana's expected utility from option A is 80 units (5,000 * 80/5,000). His expected utility from option B is also 80 units (0.5 * 65 + 0.5 * 95). Therefore, Dana will be indifferent between option A and option B because they have the same expected utility.

-Dana's Utility of Wealth Is 65 Units at $3,000, 80