If Ann's utility function is U = W^0.5,and she invests in a business which can yield $6,400 with probability 1/5,and $3600 with probability 4/5,then her expected utility is A)80. B)76. C)64. D)60.

Question

Quizplus · Accepted Answer

To find the expected utility, we need to calculate the expected value of the payoff and then plug that into Ann's utility function.

Expected value of the payoff:
(1/5)($6,400) + (4/5)($3,600) = $4,080

Expected utility:
U = W($4,080)^1U1P1^0.5S1S1P0 = W($4,080)^1(1)^0.5(1)(1)^0 = W( $4,080)^0.5

Since we don't have any additional information about Ann's preferences, we can't solve for W or make a specific recommendation. However, we can say that her expected utility for this investment is approximately 64.

If Ann's Utility Function Is U = W0

If Ann's Utility Function Is U = W⁰