-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.The midpoint of the chord that runs from zero and intersects the utility function where wealth is 100,represents Bob's
A) risk premium.
B) expected utility of receiving $50 with certainty.
C) expected utility of receiving $0 50% of the time and $100 50% of the time.
D) risk neutrality.

Question

-The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.The midpoint of the chord that runs from zero and intersects the utility function where wealth is 100,represents Bob's
A) risk premium. 
B) expected utility of receiving $50 with certainty. 
C) expected utility of receiving $0 50% of the time and $100 50% of the time. 
D) risk neutrality.

Quizplus · Accepted Answer

The midpoint of the chord represents the expected utility of a gamble—in this case, the gamble of having a 50% chance of $0 and a 50% chance of $100. This is because the utility function reflects Bob's preferences over different wealth levels, and the chord's midpoint captures the average utility of the two outcomes weighted by their probabilities.

-The Above Figure Shows Bob's Utility Function