Mel's utility of wealth is 130 units at $3,000, 160 units at $5,000, and 190 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 0.4 or $9,000 with probability 0.6. Mel
A) will choose A.
B) will choose B.
C) is indifferent between A and B.
D) needs more information to make a choice.

Question

Quizplus · Accepted Answer

Mel will choose option B because the expected utility of option B (0.4 * 130 + 0.6 * 190 = 166) is higher than the utility of option A (160).

Mel's Utility of Wealth Is 130 Units at $3,000, 160