-Beachcomber Beatrice spent her entire wealth of $100,000 to build a beach house on the Gulf of Mexico. There is a 10 percent chance that the house will be totally destroyed by a hurricane. Beatrice's utility of wealth schedule is given in the table above. What is Beatrice's expected wealth?
A) $10,000
B) $50,000
C) $90,000
D) $100,000

Question

-Beachcomber Beatrice spent her entire wealth of $100,000 to build a beach house on the Gulf of Mexico. There is a 10 percent chance that the house will be totally destroyed by a hurricane. Beatrice's utility of wealth schedule is given in the table above. What is Beatrice's expected wealth?
A) $10,000 
B) $50,000 
C) $90,000 
D) $100,000

Quizplus · Accepted Answer

Beatrice's expected wealth is calculated by considering the probability of the house being destroyed and not being destroyed. With a 10% chance of destruction, her wealth would be $0, and with a 90% chance of no destruction, her wealth remains $100,000. Thus, expected wealth = (0.1 * $0) + (0.9 * $100,000) = $90,000.

-Beachcomber Beatrice Spent Her Entire Wealth of $100,000 to Build