-George is considering investing in a frozen yogurt store. If the store does well he will make $20,0000, but if the store does poorly he will make only $10,000. There is a 50 percent chance of each outcome. His utility of wealth schedule is in the above table. The expected utility of this investment is
A) 115.
B) 140.
C) 165.
D) 180.

Question

-George is considering investing in a frozen yogurt store. If the store does well he will make $20,0000, but if the store does poorly he will make only $10,000. There is a 50 percent chance of each outcome. His utility of wealth schedule is in the above table. The expected utility of this investment is
A) 115. 
B) 140. 
C) 165. 
D) 180.

Quizplus · Accepted Answer

The expected utility is calculated by taking the probability-weighted average of the utilities of each outcome. Assuming the utility of $20,0000 is 180 and the utility of $10,000 is 150, the expected utility is (0.5 * 180) + (0.5 * 150) = 165.

-George Is Considering Investing in a Frozen Yogurt Store