Rhonda's utility of wealth is 65 units at $5,000, 80 units at $7,000, and 95 units at $10,000. Starting from zero wealth, she must choose between options A and B. Option A gives her $7,000 for sure. Option B gives her $5,000 with probability 0.6 or $10,000 with probability 0.4. Rhonda
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

Rhonda will choose option A because the expected utility of option B is lower than the utility of option A. The expected utility of option B is (0.6 * 65) + (0.4 * 95) = 78, which is less than the utility of 80 from option A.

Rhonda's Utility of Wealth Is 65 Units at $5,000, 80