Joe is risk-neutral with utility U = bR,where b is a positive constant and R is profit from a venture.If a gamble has a 0.4 chance of R = 1 and a 0.6 chance of R = 2,Joe's expected utility E(U)is:
A) b.
B) 1.4b.
C) 1.5b.
D) 1.6b.
E) 2b.

Question

Quizplus · Accepted Answer

Joe's expected utility E(U) is calculated as the weighted average of the utilities of each outcome: E(U) = 0.4 * b * 1 + 0.6 * b * 2 = 0.4b + 1.2b = 1.6b.

Joe Is Risk-Neutral with Utility U = BR,where B Is