Yoram's expected utility function is pc^1/2₁ + (1 - p)c^1/2₂, where p is the probability that he consumes c₁ and 1 - p is the probability that he consumes c₂.Wilbur is offered a choice between getting a sure payment of $Z or a lottery in which he receives $2,500 with probability .30 and $3,600 with probability .70.Wilbur will choose the sure payment if A)Z 3,249 and the lottery if Z 2,874.50 and the lottery if Z 3,600 and the lottery if Z 3,424.50 and the lottery if Z 3,270 and the lottery if Z

Question

Yoram's expected utility function is pc^1/2₁ + (1 - p)c^1/2₂, where p is the probability that he consumes c₁ and 1 - p is the probability that he consumes c₂.Wilbur is offered a choice between getting a sure payment of $Z or a lottery in which he receives $2,500 with probability .30 and $3,600 with probability .70.Wilbur will choose the sure payment if A)Z > 3,249 and the lottery if Z < 3,249. B)Z > 2,874.50 and the lottery if Z < 2,874.50. C)Z > 3,600 and the lottery if Z < 3,600. D)Z > 3,424.50 and the lottery if Z < 3,424.50. E)Z > 3,270 and the lottery if Z < 3,270.

Quizplus · Accepted Answer

The expected value of the lottery is calculated as (0.30 * $2,500) + (0.70 * $3,600) = $3,249. Wilbur will choose the sure payment if it is greater than this expected value.

Yoram's Expected Utility Function Is Pc1/21 + (1 - P)c1/22

Yoram's Expected Utility Function Is Pc^1/2₁ + (1 - P)c^1/2₂