A given person is risk neutral through all relevant levels of income.The expected utility of receiving an extra $5,000 with probability 0.5 and an extra $15,000 with probability 0.5 must be:

Question

Quizplus · Accepted Answer

Since the person is risk neutral, the expected utility formula simplifies to the expected value of the outcomes. The expected value of receiving an extra $5,000 with probability 0.5 and an extra $15,000 with probability 0.5 is (0.5 x $5,000) + (0.5 x $15,000) = $10,000, which is the same as receiving an extra $10,000 with certainty. Therefore, the expected utility of both options is the same, and the answer is B.

A Given Person Is Risk Neutral Through All Relevant Levels